“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
— Warren Buffett
Warren Buffett, a legendary investor with a pristine reputation, has not said anything yet about the disclosure of the phony account scandal that has decimated Wells Fargo’s reputation. Berkshire Hathaway, led by Buffett, owns 10 percent of Wells Fargo’s shares. Given the large amount of skin he has in the game, the Oracle of Omaha needs to share his expertise on corporate governance to rectify Wells Fargo’s poor stewardship.
To begin repairing its reputation, Wells Fargo must:
¦ Change its culture. It can no longer put so much pressure on employees to cross-sell its products that it encourages illegal activity.
¦ Significantly claw back its executives’ bonus packages.
¦ Terminate chairman and CEO John Stumpf.
Wells Fargo on Sept. 8 agreed to a $185 million settlement with the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency and the Lost Angeles city attorney. Because the bank’s employees created some 2 million fake bank accounts and were responsible for other irregularities, Wells Fargo’s customers paid overdraft fees and late fees on credit cards and deposit accounts they never knew existed.
Stumpf, at a Sept. 20 Senate hearing, failed to overcome skepticism about whether his bank has taken the appropriate steps to either punish the executives that encouraged bank employees to create millions of bogus bank and credit card accounts or to institute major changes in the corporate culture that put a premium on cross-selling. Cross-selling is pushing several services on customers when they open an account. Examples are encouraging the customer to use the bank’s wealth management services, to get a Wells Fargo credit card or to use the bank when getting a mortgage.
Mr. Stumpf’s testimony has fueled the outrage of both politicians and the public. At the hearing, senators from both sides of the aisle criticized the fact that the scandal did not result in senior executives being fired or having their enormous pay packages clawed back. At the same time, 5,300 of the bank’s lowest-paid workers (making $12 per hour) were fired.
Sen. Elizabeth Warren, who advocates Stumpf resigning, said: “Your definition of accountability is to push this on your low-level employees. This is gutless leadership.”
Sadly, the miscreant behavior of Wells Fargo, a bank whose financial services and wagons helped develop the old west, seems endemic to our financial institutions. Recent scandals include banks that:
¦ Issued misleading stock research to receive lucrative initial public offering orders.
¦ Provided false information about their borrowing costs to manipulate the London Interbank Offered Rate, a benchmark rate that affected millions of mortgages, corporate bonds, student loans, government bonds and other products.
¦ Created and sold securities backed by mortgages to borrowers who could not repay those loans. The subsequent defaults undermined the solvency of institutions globally and led to the Great Recession.
Our banks have grown exponentially in size and scope since the repeal in 1999 of the 1933 Glass-Steagall Act that prohibited commercial banks from engaging in the investment business. It was an emergency response to the failure of nearly 5,000 banks during the Great Depression.
Time and time again, our nation’s commercial banks have engaged in major scandals for which they paid billions of dollars in fines. But until bank executives repay their large bonuses, lose their jobs and/or serve prison sentences, we will continue to witness irresponsible behavior.
Executives’ classic defense is that they were unaware of transgressions because these mistakes were executed at much lower levels of the organization or the transgressions involved arcane operations. This defense is no longer tenable — the dollars and numbers involved are too big.
But if we assume that CEOs are indeed unaware of their bank’s misdeeds, we need to take steps to reduce the size of our commercial banks and/or consider reinstating the restrictions of Glass-Steagall Act.
To make any of that happen, it would help if Warren Buffett took a stand.
Originally published in the Sarasota Herald-Tribune
