The Wells Fargo Scandal: Is the Profit Model to Blame?


US prosecutors have begun an investigation related to sales practices at Wells Fargo & Co that led the bank to agree to a $190 million settlement with regulators, a person familiar with the matter said on Wednesday.

On Tuesday Wells Fargo, which says it serves one in three US households, announced that it was eliminating sales goals in retail banking as of January 1. Chief Executive Officer John Stumpf also sent an e-mail to customers on Wednesday apologizing for the actions. She announced earlier this year that she would retire from Wells at the end of 2016.

Tolstedt received a pay raise in March, after getting more than $9 million in cash and stock past year. That was set to reach $1.75 million this year before Tolstedt announced her retirement.

Wells Fargo has forgotten that a bank is not a social experimentation petri dish.

Specifically, approximately 5,300 employees may have opened roughly 1.5 million deposit accounts, transferring funds from consumers' accounts to temporarily fund the new, unauthorized accounts. Debit cards were issued and activated, as well as PINs created, without telling customers.

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In some cases, Wells Fargo employees even created fake email addresses to sign up customers for online banking services, regulators said. "People are paying attention", says Cook, who recalls a movement during the 2008 financial crisis to move money from large banks to credit unions and smaller banks. Wells Fargo ranks fourth among global banks in the amount of fines paid ($10 billion) over the past eight years, according to a report in USA Today. Michigan State University professor of economics and worldwide relations Lisa Cook worries that such a profit model is common across the industry and that other banks, too, may be guilty of similar practices.

Also on Tuesday, U.S. Treasury Secretary Jacob Lew called Wells Fargo's sales practices "bad behavior" and showed the need for tough oversight of banks and other financial firms. A settlement with regulators last week over sales tactics and cross-selling of products has raised questions about the bank's culture and controls, especially around its push for employees to sell multiple products to individual customers. Abraham Simmons, a spokesman for the San Francisco office of U.S. Attorney Brian Stretch, said he could neither confirm nor deny the existence of an investigation.

Torrie Matous, a spokeswoman for the committee's chairman, Richard Shelby, a Republican from Alabama, said staff has "been arranging briefings and collecting information from both Wells Fargo and the regulators" to prepare for a hearing on September 20. Mr. Stumpf said that those fired included bankers, managers and managers of managers, but declined to name the most senior executive let go.

Wells Fargo executives were scheduled to brief Senate Banking Committee staff on Tuesday, with regulators making presentations later in the week in preparation for the hearing, according to a committee aide.