Tuesday, September 13, 2016

If corporations are people then treat them like people: Close down misbehaving corporations.

Carrie Tolstedt, Wells Fargo executive who
presided over a massive criminal enterprise
and will be paid $125,000,000 for doing so.
In the Citizens United case the US Supreme Court held that corporations must be treated like people, for purposes of First Amendment speech rights, at least.

Corporations should, in fact, be treated like people, because treating them any other way hurts society while allowing, if not rewarding, wrongdoing. Corporations who violate the law in a severe enough way should be disbanded and prohibited from ever doing business again.

Earlier this week, the news broke that for the past five years, Wells Fargo has been letting employees create fake accounts on behalf of customers. Wells Fargo employees at many levels are required to 'cross-sell,' that is, to get existing Wells Fargo customers to buy other Wells Fargo products. It is important to note that word: products. Banks exist, like any business does, to sell you something. Banks do not exist primarily to hold your money and pay you interest; that's a thing they must to do operate as banks.

Your bank deposits help keep the bank's "reserve" up: a "reserve" is the amount of money a bank must have to cover its current obligations. Not that it matters much, because if a bank falls short on a daily basis the Fed will lend it the money anyway to cover those transactions. So the bank wants your deposits because it helps them keep up their reserve, but if a bank really wanted your money it would offer far better interest rates. Look at the returns promised by mutual funds, and the returns promised by banks, and determine which actually wants your money.

Banks actually want you to leave as little money as possible in them, if you are an average consumer. Banks used to require minimum balances in checking accounts. Over the past 20 years, banks have increasingly switched to checking accounts that require no minimum, and offering short-term personal lines of credit for people who overdraw their account. After legislation (in the wake of The Great Recession) limited banks' ability to charge fees, banks responded by upping their fees for overdrafts and negative balances, and by 2014 were making about $32,000,000,000, collectively, from such fees. That profit was equal to what banks earned from such fees in 2006, prior to all the regulations being implemented.

Banks also, in the wake of new regulation, began trying to sell  you additional services: loans, credit cards, whatever they could. This is increasingly profitable: since 2013, banks' quarterly income from non-interest income has risen from $59,000,000,000 (rounding up to the nearest billion) to $66,000,000,000 (ditto.)

Wells Fargo demonstrated the continuing prevalence of systems which provide the wrong incentives with too little oversight. In the years running up to The Great Recession, the big problem was that incentives in the lending industry were generating new loans, not modifying old loans. (A new loan typically pays more in origination fees and adds capital to the bank's value, whereas a modified loan typically reduces the income.)  Mortgage originators and bankers created systems like "no doc" loans, where they would simply believe what a person said about their income and assets on paper, and make a loan, and the incentive was to simply make the loan and sell it, not care whether the loan performed. That was Somebody Else's Problem.  And it led to The Great Recession.

Wells Fargo, in the wake of regulation restricting its ability to make new loans and in light of restrictions on overdraft fees, created a system where it had employees 'cross-sell' other products. "Cross-selling" in banks is the same as when a person at McDonald's asks if you want fries with that: it takes a person who already is interested in doing business with you, and gets them to do more business with you.

Wells Fargo imposed draconian requirements on employees to cross-sell and punished those employees who didn't make the cut. Anywhere from 3-15% of employees' incomes were determined by payments related on their ability to cross-sell.  Wells Fargo does not seem to have had any sort of scrutiny of the system, which led to millions of fake accounts for credit cards, new bank accounts, and the like being set up for borrowers who didn't know it was being done. In some cases, money was transferred to these new accounts, resulting in an overdraft fee on the old -- a double win for the banks!

In the wake of the scandal, these things have happened:

Wells Fargo was levied $185,000,000 in fines. This is inconsequential: Wells Fargo reported $5,560,000,000 in net profits in the second quarter of 2016 alone. The fine was equal to 3% of its quarterly profits. To put this in perspective: if you are a Wells Fargo employee and work for $10 per hour, a 3% of your quarterly income fine equals $156.

Wells Fargo fired 5,300 employees. That figure has been reported as though it happened this week. It did not. The 5,300 employees were fired over the last few years. It appears that few, if any, executives were fired.  

Wells Fargo's stock price has barely moved and many analysts think it is worth buying or holding.  This demonstrates the fact that shareholders are unable or unwilling to police a company's practices.  Warren Buffett, who enjoys a reputation as the kind of billionaire you'd like to pal around with, owns 9.5% of the bank, and is its largest shareholder. I haven't seen any quotes from the Denny's-loving billionaire about what he might do with his control of the world's most profitable bank.

Several Democratic senators, demonstrating how little the government wants to regulate Wall Street, have "demanded" an explanation. Hillary Clinton denounced it. Presumably, Wells Fargo shrugged.

Wells Fargo executives, meanwhile, will receive millions in payments including $125,000,000 going to the retiring head of the department that committed all the crimes. Letting Carrie Tolstedt (the exec in question) keep her money and not face charges is like letting Al Capone go and executing the driver of the getaway car.

As a professional, I am subject to scrutiny by the courts and the State Bar of Wisconsin. Doctors, accountants, nurses, truck drivers -- anyone who holds a license can, if they behave badly enough, have their license revoked, effectively shutting them out of that industry.

I'm not an expert on the types of regulations the federal government uses to monitor banks -- I'm a consumer lawyer, not a regulatory compliance guy -- but if the power does not exist to shut down banks for illegal activities, then it should. The fact that politicians levy nominal fines, let rank-and-file employees be fired, and allow rewards in the hundreds of millions to executives is a shameful facet of our country. But, then, so many things are, these days.


Andrew Leon said...

We should all just own up to the fact that we are currently being run by corporations and not the government.

Briane Pagel said...

That is increasingly true.