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How To Take On the Banksters

Senator Elizabeth Warren took Wells Fargo CEO John Stumpf to task yesterday, and she pointed out that nothing will change on Wall Street or in the boardrooms of America's banks until we start prosecuting executives who oversee fraud.

She's right, but to avoid scandals like this one, we also need to fundamentally change the way that corporate executives get paid.

Ever since the Reagan administration, instead of actually investing in research and development or raising workers' wages, corporate executives have focused more and more on inflating a company's stock prices and dividends.

This is because, over that same time, changes in the tax code made it so that CEOs like Stumpf are better off getting most of their income from so-called "performance based pay", also known as stock options.

Between the "shareholder revolution" of the 1980s and the changes to how executives can be paid, our economy is now riddled with perverse incentives that distort the values and priorities of American businesses.

And Wells Fargo CEO John Stumpf is proof.

Earlier this month, Wells Fargo settled with a Los Angeles prosecutor and with federal regulators who accused the bank of opening more than 2 million checking and credit accounts for customers, without the customers' knowledge!.

And while Stumpf has repeatedly claimed to be accountable for the scandal, he hasn't DONE anything to make himself, or any of the other senior executives, accountable for this massive scandal.

"Did you fire any of those people? [...] No. OK, so you haven't resigned, you haven't returned a single nickel of your personal earnings, you haven't fired a single senior executive. Instead evidently your definition of "accountable" is to push the blame to your low-level employees who don't have the money for a fancy PR firm to defend themselves. It's gutless leadership."

Warren went on to explain how Stumpf borrowed logic from Dr. Seuss to encourage Wells Fargo employees to push cross-selling.

"In your time as chairman and CEO, Wells has been famous for cross-selling, which is pushing existing customers to open more accounts. Cross-selling is one of the main reasons that Wells has become the most valuable bank in the world. Wells measures cross-selling by the number of different accounts a customers has with Wells. Other big banks average fewer than three accounts per customer. But you set the target at eight. Every customer of Wells should have eight accounts with the bank. And that's not because you ran the numbers and found that the average customer needed eight banking accounts. It is because, 'Eight rhymes with great.' "

But that logic is about as good as any, because the truth of the matter is that cross-selling isn't meant to be good for customers.

It's meant to inflate stock prices, and consequently enrich investors and executives, like Wells Fargo CEO John Stumpf himself.

When Senator Warren pressed Stumpf on that point though, he denied the claim and declared that "cross-selling is about deepening relationships", a response that Warren rejected with evidence.

"You say no? Here are the transcripts of 12 quarterly earnings calls that you participated in from 2012 to 2014, the three full years in which we know this scam was going on. I would like to submit them for the record if I may, Mr. Chair. Thank you. These are calls where you personally made your pitch to investors and analysts about why Wells Fargo is a great investment. And in all 12 of these calls, you personally cited Wells Fargo's success at cross-selling retail accounts as one of the main reasons to buy more stock in the company."

Wells Fargo wasn't just ripping off customers to pad their bottom line either, this is a scam that personally made Stumpf A LOT of money.

"While this scam was going on, you personally held an average of 6.75 million shares of Wells stock. The share price during this time period went up by about $30, which comes out to more than $200 million in gains, all for you personally. And thanks, in part, to those cross sell numbers that you talked about on every one of those calls."

That's right, over the three years that this scam went on and employees were pressured to cross-sell products, Stumpf personally saw his portfolio grow by over $200 million!.

That shouldn't come as a surprise though.

Ever since the "Greed Is Good" era of the 1980s, the motto for big business in America has been simple: forget the employees, forget the customers, forget the products, forget the environment, forget the community, and forget ethics in general.

Forget all of those things, the new motto is "do whatever it takes to pump up the stock value and guarantee big payouts to the CEO and senior executives".

And if anything goes wrong, like it did at Wells Fargo, there's plenty of scapegoats at the bottom of the business who can take the fall.

"[Y]ou 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 of dollars in your own pocket. And when it all blew up, you kept your job, you kept your multimillion dollar bonuses and you went on television to blame thousands of $12 an hour employees who were just trying to meet cross-sell quotas that made you rich. This is about accountability. 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."

Warren's right to call for a criminal investigation, but without more support from Republicans in Congress, this may sadly just have been another impassioned speech rattling around the halls of Congress, and not a catalyst for real change.

We need real bipartisan efforts to rein in corporate greed and to hold executives accountable when they exploit their employees and defraud their customers.

And if we really want to rein in the excesses in corporate executive suites, we need to return to the pre-Reagan tax and compensation system that encouraged businesses to take up a "stakeholder model," where businesses account for the well-being of customers, employees, and community members, and not just financial investors..

And that means doing away with executive stock options so that CEOs aren't so focused on inflating stock values, even criminally, as we've seen over and over again, just to inflate their own personal wealth.

Comments

Edward J. Dodson's picture
Edward J. Dodson 2 years 34 weeks ago
#1

Yes, banking (and other executives) need to be prosecuted for their criminal behavior. And, yes, the laws governing corporations need to be changed to end the incentives to engage in such activities that result in personal benefit at the expense of employees, customers and the general public. We need legislation that gives advantage to publicly-owned, not-for-profit banks. We need to replace the system of debt money creation with direct government issuance of currency. We need legislation to reinstitute the separation of investment banking from commercial banking. And, we need tax reforms that eliminate the advantage given to income derived from rent-seeking and the gains on sale of financial assets and landed assets over income derived by producing goods and delivering services. In short, we need to reign in on the rentier-dominated system that is destroying democracy.

ChristopehrCurrie's picture
ChristopehrCurrie 2 years 34 weeks ago
#2

The Obama Administration is notorious for refusing to personally prosecute people who are "filthy rich" no matter how many people they fraudulently hurt. Senator Warren is right, but she should be point her finger at Obama as well.

Greg Kramer's picture
Greg Kramer 2 years 34 weeks ago
#3

Edward,

Outstanding comment!!! You are not alone.

cccccttttt 2 years 34 weeks ago
#4

Tom and E. Warren reveal to the public the ugly system.

An angry mass movement elects a Dem majority and a Dem president.

In some worlds this would lead to laws that put the oversight execs into jail.

But not in this one where Hillary is more corrupt than the execs in question.

ct

orlbucfan99's picture
orlbucfan99 2 years 34 weeks ago
#5

Thom: Great essay. I agree wholeheartedly, but as a fellow Boomer and an informed voter, how do we peacefully undo all the damage from the Reagan years? With climate change staring us in the face we don't have the luxury of time like the corporate yahoos had in 1980. BTW, that was an excellent piece you did on the multi-national corporations gearing up for the threats from climate change. Thanks.

2950-10K's picture
2950-10K 2 years 34 weeks ago
#6

It's too bad Warren didn't ask Stumpf if the $200 million gain made his life happier? I bring this up because research has shown that massive wealth doesn't lead to more personal happiness. However we do know that Stumpf has created misery for the 5000 fired employees, and I'm sure many of them have young kids.....all of this because government couldn't prevent his out of control behavior.

humanitys team's picture
humanitys team 2 years 34 weeks ago
#7

Great point 2950-10k Thom makes the same point in his book The Last Hours Of Ancient Sunlight page 273 The Secret of "Enough".

But is it the governments place to control his behaviour? Or is this a product of our culture .Perhaps new beliefs can change these unacceptable Alpha males greed .As someone famous once said "No one does anything wrong given their model of the world".

Time for a new model .

humanitys team's picture
humanitys team 2 years 34 weeks ago
#8

Great point 2950-10k Thom makes the same point in his book The Last Hours Of Ancient Sunlight page 273 The Secret of "Enough".

But is it the governments place to control his behaviour? Or is this a product of our culture .Perhaps new beliefs can change these unacceptable Alpha males greed .As someone famous once said "No one does anything wrong given their model of the world".

Time for a new model .

2950-10K's picture
2950-10K 2 years 34 weeks ago
#9

humanitys team: I definitely need to read Thom's books. I spend most of my time on history ...need to break free from that.

I think government neeeds to intervene in ones behavior when their model of the world, in this case, causes widespread economic hardship for others. Of course this corrective/controlling action would require "good government", and we obviously don't have that yet.

However I don't disagree that it would be preferable to do it with a new belief system, maybe one like many Native Americans held before we contaminated their world with our European style of lust for greed.

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