Wells Fargo: Does it really matter?

About a month ago, the Consumer Financial Protection Bureau (CFPB) announced it had reached a deal with Wells Fargo for the bank to pay a $190-million fine for opening bogus accounts in customer names.  Ostensibly, this practice was widespread and systemic to its consumer banking culture and driven by highly unrealistic cross-selling goals – so much so that the bank disclosed that it had opened as many as 2 million fraudulent accounts and now has terminated 5,300 employees connected with the scheme. 

But it hasn't ended there.  First came the flood of lawsuits.  One in California on behalf of the fired employees sought $2.6 billion as a class for being fired.  Another one in Utah on behalf of the defrauded customers as a class sought unspecified damages for emotional distress.  And another in California on behalf of investors as a class sought unspecified damages for being misled into buying Wells Fargo stock when it was flying high, purportedly fueled by the fraudulent account openings.  This isn't a surprise.  Banks are easy targets for litigation, and big banks get sued for every possible reason every day.  Regardless, Wells probably deserves some of this legal harassment.

Next came the now traditional hearings by the Senate and Congress.  The usual players hauled Wells Fargo CEO John Stumpf to Washington and played it up for the media.  He was told he had "gutless leadership," and his bank was called a "criminal enterprise," just to cite a few of the more sensational remarks.  Did he deserve this?  Absolutely.  Will it result in any meaningful outcomes?  Probably not, except the earnest-sounding senators and members of Congress now have some good soundbites for their re-election campaigns, and Stumpf retires early.

Finally, not to be left out of a great P.R. opportunity, state and local governments jumped into the fray.  California was first, quickly followed by Illinois, Chicago, and then Seattle and Ohio.  Big banks often help governments manage their investments and issue municipal bonds and debt.  Wells Fargo is not at all different, and to show their disgust, these cities and states chose to give the bank a "time-out" – they suspended doing business with Wells for a year.  But does this matter?

To be sure, the state of California is a financial behemoth, and Illinois, Chicago, and Seattle aren't small, either.  They all have a lot of money pass through their coffers, and they also all borrow a lot and sell a lot of bonds.  By cutting Wells out of the game for a year, they are "voting with their checkbooks" and sending a message that they won't tolerate the bank's fraud.  After all the shouting on Capitol Hill, and all the lawsuits clogging up the courts, finally someone is hitting Wells where it hurts.

Except that's not what's happening at all.

Wells Fargo's wholesale banking division generated about $26 billion in gross revenue last year.  According to recent public filings and disclosures, state and local governments accounted for about 3% of that (before expenses).  While it's true that's about $750 million, it's less than 1% of the corporation's total revenue.  From a reputational standpoint, it's important, but financially, it's barely a rounding error.  A show for the cameras.

Yes, all of this negative publicity will take its toll on Wells Fargo.  And yes, every penny of profit matters, so the government boycotts of doing business with them matter as well.  But stepping back and taking the long view, will any of this matter?  Apparently not.  Tim Sloan, Wells Fargo's then-chief operating officer and now CEO, recently said the bank would get back all of its lost business in just a year or two.  "There's no question in my mind."

Kevin Cochrane was a senior banking executive for over 25 years and currently teaches business and economics at Colorado Mesa University.  He is also a permanent visiting professor of economics at The University of International Relations in Beijing.

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