What keeps the CEOs of financial institutions awake at night? One or two errant employees out of tens of thousands can bring down the franchise.
What robs financial institution heads of sleep explains the superfluity of governmental punishment for errors inside financial institutions. Think what happened to Wells Fargo in 2018. What the federal government did to the financial services giant was disturbing then, and it still is now.
Stop and think how crippling it would be for the federal government to discipline a business by strictly limiting its ability to grow. But we’re getting ahead of ourselves.
Traveling back in time, in 2018 Wells Fargo was punished for the creation of fake accounts by – yes – errant employees. The compensation structure for Wells Fargo employees included incentives for upselling customers on the suite of products offered by the bank. At the time, regulators at the Federal Reserve levied an “asset cap” on Wells Fargo of $1.95 trillion that forced it to pass up on enormous amounts of retail and corporate business. Which requires a pause.
If you’re not profiting in business, you’re not long for the world of business. Which is just a comment that businesses are always growing, or trying to grow.
Applied to Wells Fargo, the incentives it created for employees to upsell customers into a wide variety of products weren’t just a feature of Wells Fargo, but also a feature of employment at the bank. It ensured that employees wouldn’t simply go through the motions, rather they would learn the bank’s myriad products with an eye on earning more money through the presentation of those same products to customers. Incentives were aligned.
Just the same, there will always be a few bad apples at any corporation, and for that matter at any financial institution. See above. It’s not just that a wrongheaded employee can make a mistake that will result in huge losses, it’s that an employee could make a mistake that would result in reputational losses that in many ways are more costly than financial errors. As no less than Warren Buffett once put, “It takes 20 years to build a reputation and five minutes to ruin it.”
Which should tell readers something about Wells Fargo. Specifically, it didn’t need a law, or fear of the Fed, or an “asset cap” to keep it from protecting its customers from bank employees taking the easy route of opening accounts for customers that they’d not requested. The financial implications of a reputational hit from the latter were already enough.
Yet internal controls aren’t always foolproof, hence the situation that Wells Fargo found itself in. Wells didn’t just take a reputational hit for the actions of very few, it was also forced by federal decree to cease growing for seven years. The asset cap was finally lifted last month. Wells Fargo’s market cap then and now shows the folly of the punishment.
Really, does anyone seriously think it would risk so much for a few or many “fake accounts”? Hopefully the question answers itself.
It’s a comment that the punishment Wells Fargo, its employees, and shareholders paid for was excessive. And that’s an understatement. With a $200 billion+ market cap, Wells Fargo didn’t need to fake anything. As its market valuation then and now makes plain, the products were already excellent but for very few ruining what was great for hundreds of thousands of employees.
Yet the penalties foisted on Wells Fargo were plainly brutal. Again, businesses exist to grow to the betterment of employees, shareholders, and cuustomers. The asset cap that Wells Fargo was forced to endure benefited no one.