“Abuses in the mortgage-backed securities industry led to a financial crisis that devastated millions of Americans. Today’s agreement holds Wells Fargo responsible for originating and selling tens of thousands of loans that were packaged into securities and subsequently defaulted.” — Alex Tse, U.S. attorney for the Northern District of California. The choices of our bankers come back to haunt them, and us!
Its been more than a decade since the bottom dropped out of the housing market, and my how time flies. Except for the management of Wells Fargo & Company who have been waiting for the shoe to drop. The shoe has finally dropped in the form of a fine, to the tune of $2.09 billion.
It was predicted
The $2 billion penalties that rained down on the bank was predicted. Other banking institutions have had to pay more, but given all of Wells Fargo’s recent legal woes, this has got to sting.
For example, it was just in April 2018, that the Consumer Financial Protection Bureau fined the bank $1 billion over claims of improper mortgage and auto-lending practices.
I’m not feeling the least bit sorry for Wells Fargo. Tens of thousands of investors and numerous banks lost billions because Wells Fargo intentionally avoided due diligence and misstated the incomes of their borrowers.
It all started in 2005 when Wells Fargo pushed its people to double production (a fancy word for pushing sales). As part of the “push”, the bank told its people it was going to loosen the standards. Why did they do this? Because they thought the merry-go-round of home sales was going to go on forever, especially in markets such as Phoenix and Las Vegas. It was what might be called the “Greater Fool” theory where someone “far down the road” might get stuck, but Wells Fargo figured that the road would be long. Wells Fargo was more than happy to submit incomplete or misleading documents.
There were some ethical voices at Wells Fargo in departments such as risk management. The voices were snuffed out. Instead of accepting that what it was doing was irresponsible, the bank kept pushing its lenders to expand the high-risk loans. They felt they didn’t have to worry because after all, the mortgages were backed by the government. If the mortgages went into default (in Wells Fargo’s corporate mind very unlikely), then it would fall to FEMA and HUD. Ultimately, that would mean you and me.
As investigators looked into the Wells Fargo mortgages, they found that about 70 percent of the Wells Fargo mortgage loans they sampled “had an unacceptable discrepancy between stated and actual income.” When the economy started to teeter in 2007/2008, thousands of Wells Fargo home loans began to default.
Said the Justice Department:
“Despite its knowledge that a substantial portion of its stated income loans contained misstated income, Wells Fargo failed to disclose this information.” Wells Fargo knew exactly what it was doing. They had no conscience and no sense of ethical behavior. When the $2 billion fine came down, Wells Fargo issued the following statement:
“We are pleased to put behind us these legacy issues regarding claims related to residential mortgage-backed securities activities that occurred more than a decade ago,” said Chief Executive Officer Tim Sloan.
Though Wells Fargo has agreed to pay the penalty, they will not admit to any wrongdoing. Looking into the wording of the CEO’s statement above, no matter how brief and innocuous, we get a sense of how willing they are to view the unethical behavior as something that is somehow buried deep in the past. The argument might be made that the bank was truly contrite, has not Wells Fargo repeatedly and consistently gotten itself into trouble through unethical business practices.
The ultimate rationalization
In many ways, this case is no different than Medicaid fraud or car insurance fraud. It is the mindset of an unethical player who sees the government as some sort of pot of gold that has no bottom. Though tens of billions of dollars were at stake, Wells Fargo executives were no different than a single chiropractor chasing ambulances to get at no-fault health insurance money.
The problem with nationalization is that the assumptions are frequently based on a false set of premises. It is not a matter of changing the rationalization but of teaching ethical behavior, something Wells Fargo seems hesitant to accept, thus the choices of our bankers come back to haunt them.
