By Nicole Gelinas
Eight years ago Wednesday, Lehman Brothers collapsed into bankruptcy. To stem the panic, the feds launched the biggest bailout the world has ever seen. In rewarding failure, America allowed a broken, corrupt financial system to flourish — and, yes, has invited populists like Donald Trump to take the stage.
The latest example of how greed is not good, especially when it’s backstopped by government guarantees: Last week, federal regulators revealed that Wells Fargo, the country’s third-largest bank, had opened 1.5 million bank accounts and 565,000 credit-card accounts without customers’ permission over the past five years.
How could that happen? At least 5,300 workers engaged in what the government calls “abusive” acts: using a customer’s personal information from one legitimate account to open another one, and then taking money from the real account to put it into the fake one. Workers went so far as to create fake e-mail addresses and PIN numbers.
And why would this happen? Wells Fargo wanted to grow — and so it rewarded workers who opened new accounts. Employees were “spurred by sales targets and compensation incentives,” the government notes.
As punishment, Wells Fargo will pay a $185 million fine, plus refund customers the money they paid in late fees and other charges on accounts they never really had.
Officials at the Consumer Financial Protection Bureau are crowing that “Wells Fargo is paying the largest penalty the CFPB has ever imposed” since President Obama created the agency after the 2008 crisis.
The real question, though, is why Wells is even in business, since this debacle shows that it’s not very good at its main job: banking.
If five or 10 or 50 random employees came up with a scheme to defraud their employer by opening false accounts, it would be hard to blame the bank: The bank would be a victim of its workers. But 5,300 workers — and more than two million accounts?
This is systemic, pervasive behavior — including behavior that rises to the level of criminal fraud, real-property theft (by taking money from a legitimate account without permission) and identity theft, though the government oddly glosses over these crimes.
Wells Fargo’s auditing procedures should have caught out this systemic criminal victimization of its own unwitting customers. That is, after all, why you put your money in a bank — to keep it safe.
This, again, is the difference between big banks and small businesses. If my business is supposed to make wedding cakes, and I can’t do it very well, I’ll soon go out of business for lack of customers.
But if a bank’s business entails not committing fraud against its own customers, and it can’t do it well, it stays in business.
Yep, Wells Fargo is too big to fail — which is why the government allows it to pay its fines without admitting wrongdoing.
Regulators have allowed banks to do this over and over since 2008, and it’s a strange practice on both sides: If the government thinks Wells Fargo did all of these horrible things, why doesn’t it try to prove it in a court of law?
And if Wells Fargo doesn’t think it did these bad things, why doesn’t it try to defend its reputation?
Wells Fargo wasn’t quite so big before 2008. In 2007, the bank had $520.8 billion in assets. Today, it has $1.7 trillion.
But in 2008, the government, through TARP, helped Wells Fargo purchase Wachovia, another too-big-to-fail bank, and one that should have failed because of its bad mortgage bets. “The . . . capital investment from the government will enable us to finance the Wachovia acquisition,” Wells said at the time.
The purchase doubled Wells’ size overnight — and, obviously, made the bank too big to manage.
Back in 2008, the smart people said we had to bail out the banks — because if we didn’t, we’d get an economic catastrophe.
Maybe. We know what we did get: generations of voters, liberal and conservative, who are disillusioned with capitalism. They can see that the chief of Wells Fargo gets $19.3 million annually to preside over systemic fraud, while they get blots on their credit reports.
The financial world doesn’t much like Donald Trump. But if they’re still wondering where he came from, they can look to the Wells settlement, just the latest in a long line over the past near-decade.
Nicole Gelinas is a contributing editor to the Manhattan Institute’s City Journal.