Wells Fargo's toxic culture reveals big banks' eight deadly sins

In many parts of the country, the deer hunting season has barely gotten under way. But on Capitol Hill, John Stumpf, the chairman and CEO of Wells Fargo, recently had an outsize target pinned squarely to his chest.

One after another on Wednesday, the members of the Senate banking committee scored bullseyes, as they peppered Stumpf with questions, demanding explanations for Wall Street’s latest banking scandal. Just why had thousands of Wells Fargo employees fraudulently opened credit and deposit accounts in customers’ names, without the knowledge of those customers?

Stumpf’s interrogation at the hands of the bipartisan panel exposed both his personal failings and those of the bank. He failed to craft the kind of articulate and convincing responses that the senators, the bank’s customers and Americans as whole had demanded.

He stumbled. He fumbled. He couldn’t remember details. He passed the buck; he promised to get back to the senators with information. He wasn’t the kind of slick advocate for his own cause that more polished debaters like Jamie Dimon of JP Morgan Chase, or even Lloyd Blankfein of Goldman Sachs, have been when in similar plights.

Nor were the senators willing to extend a helping hand. This time, a big bank had finally gone too far. It hadn’t violated the trust of big institutional investors or even of homebuyers that might have over-leveraged themselves. Wells Fargo had cheated the most ordinary Americans: anyone opening a deposit account with the bank.

Wells Fargo’s mantra, in pushing its rank and file employees to cross-sell products, was “eight is great”. These workers faced pressure – up to and including threats of losing their job – to get every bank customer to sign up for eight products and services, regardless of whether they actually needed them.

The Senate banking committee clearly showed that eight wasn’t great. It also tore the lid off Wells Fargo’s toxic culture and revealed what I’ll call the eight deadly sins, as displayed by the bank and Stumpf himself.

Stupidity

Just what were the Wells Fargo bankers thinking when they created this kind of “pressure-cooker” sales environment? Even as the bank was puzzling over the cause of this fraud, Stumpf (according to Senator Elizabeth Warren’s particularly devastating questioning) was bragging on quarterly earnings conference calls about the bank’s increased success in cross-selling products to retail banking customers.

Self-deception

If there is one phrase that anyone watching the hearings probably became very tired of hearing Stumpf utter, it was: “The vast majority of our people did it the right way.” News flash: the reason you were sitting in front of a bunch of irate senators is because several thousand people did it the wrong way. It’s like hearing Delta Airlines say, on a day when four separate airplanes crash, that all the rest of their planes landed safely.

When asked whether the bank had reported the events to the SEC and to investors, Stumpf noted that the $2.6m in refunds paid to holders of the fake accounts wasn’t a material sum. Investors might join senators in disagreeing. Since the news of the fake accounts broke, more than $25bn has been wiped off the value of Wells Fargo’s stock; shareholders have taken a 10% haircut.

Obliviousness

Senator David Vitter of Louisiana nailed the magnitude of this deadly sin when he asked Stumpf whether it was normal “for 1% of a business unit to be fired over fraud” and for this never to be “mentioned to you”. Stumpf should have been chasing down just what was amiss at the retail banking operations as soon as headlines popped up in the Los Angeles Times in 2013, or as soon as the bank had to lay off employees for fraud, whichever grabbed his wavering attention first. But he appears to have been oblivious to what was happening. He mentioned talking at Wells Fargo “town hall meetings”, but he clearly wasn’t doing much listening. If he had, perhaps employees wouldn’t have felt the need to become whistleblowers.

Hubris

Oh, my, Stumpf is proud of the Wells Fargo culture and its history. And how he despises those evil people who despoiled it. “They broke our code of ethics. They were dishonest.” And he says he doesn’t understand what motivated them. Repeatedly, senators from both sides of the aisle tried to get Stumpf to grasp the fact that there’s something more significant afoot here than a “betrayal” of the company’s culture, and that is the fact that the culture may have been designed in such a way as to betray the company’s customers. “This isn’t the work of 5,300 bad apples. This is the work of sowing seeds that rotted the entire orchard,” said Senator Robert Menendez of New Jersey. “You and your senior executives created an environment in which this culture of deception and deceit thrived.” Do you get it now, Mr Stumpf?

Scapegoating

How many bad apples were there, and how many employees felt pushed into committing fraud by their bosses and office culture? Is Stumpf treating those who were laid off as scapegoats? That’s a point that many senators returned to repeatedly. “This is a combination of low wages, punishing sales quotas and a grossly misaligned compensation incentive,” argued Menendez. Reminding Stumpf of his testimony that the average Wells Fargo banker earns “good money”, between $30,000 and $60,000 a year, the senator asked what Mr Stumpf made in 2015. “$19.5 million.” “Now, that’s good money,” Menendez replied. When asked to put himself in the shoes of someone earning only $30,000 a year, and threatened with losing their job, all that Stumpf could say, weakly, was that “the vast majority loved Wells Fargo”. When asked whether he’d seek out those who resigned or were fired for not meeting quotas because they behaved ethically, and compensate them, Stumpf had no reply.

Greed

The grand prize for stomping on Stumpf goes to Warren. Not only did she stop him in his tracks when he tried launching into his talking points, but she went straight to the heart of the matter: greed. She displayed the transcripts of quarterly earnings calls in which Stumpf had trumpeted the bank’s success in boosting the number of new products and services sold to existing customers and explained why this made Wells Fargo a great investment. She demonstrated that she knew better than he did how many shares of Wells Fargo he owned – and told him, to the penny, the impact the stock’s gain (in part because of its retail banking successes) had had on his wealth. “You squeezed your employees to the breaking point so they would cheat customers and you could drive up the value of your stock and put hundreds of millions in your own pocket,” she said. Had he returned a penny of his bonus, out of shame, in spite of taking responsibility? That would be a “no”.

Doublespeak

Wall Street doublespeak has reached the level of an art form, thanks to Wells Fargo and Stumpf. Warren asked, more or less rhetorically, “cross-selling is shorthand for pumping up profits, isn’t it?” No one expected Stumpf to agree with the senator, but for him to answer, with a straight face, that “cross-selling is shorthand for deepening relationships” was bizarre. The hearing was littered with such moments. Perhaps Stumpf’s struggles to answer the senators’ questions directly and clearly were due to the fact that he’s really trapped in an Orwellian banking sub-universe?

Cowardice

Ultimately, it’s all about cowardice. For all his protestations to the contrary, Stumpf doesn’t really want to take responsibility. Throughout the hearings, he answered many questions by deferring to the bank’s board – even though he’s not only a director but the chairman. He doesn’t want to step up and take responsibility, whether because he is personally fearful, or because he dreads what that would mean for the bank. (Would it ignite a firestorm of shareholder lawsuits?) If he hadn’t been fearful of taking responsibility, he would have gone to the board in late 2013 or early 2014, acknowledged that this had happened on his watch, and fallen on his sword. He didn’t. Instead, he let others muddle through, didn’t demand answers or solutions, and waited while it got worse. He abdicated his responsibility to shareholders and to customers, out of cowardice.

So what’s the punishment for these sins? Warren has a clear idea.

“You should resign. You should give back the money that you took while this scam was going on and you should be criminally investigated by both the Department of Justice and the Securities and Exchange Commission,” she said. Will he? That’s one question to which we’re all still awaiting an answer.