How High Up Does the Wells Fargo Scandal Go?

We learned earlier this month that Wells Fargo (WFC 2.73%) employees opened 2 million fraudulent checking and credit card accounts for consumers between 2011 and 2015. They did so in response to pressure from management and the bank's aggressive sales culture.

But even though Wells Fargo fired 5,300 of its employees in response to this, commentators are beginning to ask whether or not some of its executives should be similarly let go.

The Motley Fool's Gaby Lapera and contributor John Maxfield discuss the controversy in this clip from Industry Focus: Financials. Listen in below to learn the details of how Wells Fargo ran afoul of consumer protection laws.

A full transcript follows the video.

This podcast was recorded on Sept. 12, 2016.

Gaby Lapera: This is really interesting. Just to get back to a point you were making earlier, we've talked on this show about how much pressure Wells Fargo puts on its employees to cross-sell products. This is kind of a natural outgrowth of that if you don't have a lot of checks and controls. I guess my question here is how high up in the Wells Fargo hierarchy do you think this goes? Do you think upper management knew this was happening, or were people who were lower down just so desperate to try and make quotas because of the, frankly what it sounds like, punishing environment if they didn't that they decided to do this fraudulent activity? Where do you think it falls in between those two poles?

John Maxfield: I think that is the question right now that needs to be addressed. I think there's two ways to look at this. First of all, John Stumpf, the chairman and CEO of Wells Fargo -- I've followed John Stumpf for, basically, the entire time that he's been CEO. In my impression, I've always had a really good opinion of John Stumpf. It would surprise me if he sat in his office and knew that millions of accounts were being fraudulently opened. That would surprise me. At the same time, when you think about the scale of what's going on here, it's almost beyond my imagination that this didn't go higher up in the company. Because, how would you not know about something this large?!

The other thing to keep in mind is that all of this behavior relates to the time period between 2011 and 2015. OK? This is a period, and we've talked about this a lot on the show, where banks are really struggling to earn the type of revenue that they're accustomed to earning, to earning the type of profits that they're accustomed to earning, and the reasons that interest rates are so low. What that means is that puts pressure on banks to find other ways to generate revenue.

You can generate revenue either through interest income or through non-interest income. Non-interest income comes from these account fees and stuff like that. The exact types of things that happened in this case. You think, "Oh, not only does it makes sense that these employees were incentivized to cross sell additional products, but it makes sense that all of this happened when it did because Wells Fargo, along with every other bank, was struggling to generate revenue." Evidently, somewhere down in the chain of command, they thought that one way to do that was to short circuit the system and open these fraudulent accounts.

Lapera: The other thing to think about, you mentioned that this is a much more stringent regulatory environment. This is kind of coming in a long line of abuses that banks have had, not just Wells Fargo. I think the most famous ones would be the overdraft fees on credit cards, charging them in the order such that the bank makes the most money. Then, of course, the mortgage fraud settlements that a bunch of banks have had to do. In fact, talking about that, this isn't the first time that Wells Fargo had to pay out even this year because in February of this year, they agreed to pay $1.2 billion as part of a mortgage fraud settlement which was brought against the company in 2012. Of course that was for mortgages that were given out right before the financial crisis, but it's one of those things that you see this in the news and you are like, "Why Wells Fargo? Why? You should have known so much better at this point."

Maxfield: Yeah. That overdraft thing. That was on debit cards. I mean, to your point Gaby, this is not just an isolated incident at an isolated bank. This is a pattern of behavior that is anti-consumer that is going on and has been going on for many years in the banking industry. If there's any bankers listening to this, I know that they would deny that, but the facts are simply just too clear that that's what's been going on.

If you go back, you have the overdraft thing that is the point you made. That was a really bad thing because what they were doing is they would go in and surreptitiously...they would disclose the fact that they did this in those 20-page agreements that you would sign when you need to open an account, but nobody reads those. Right? For all intents and purposes, the typical person probably had no clue that this was going on. You would go in.

Let's say you had five transactions in a day. Four of them were for lattes. Right? $2 each or I guess lattes aren't $2. What, am I living in the mid-1990s or something?! I want to say lattes are, what, like $4.50 each or whatever it is. Then you had, let's say, a car. You had to fix your car. You paid to fix your car, let's say, $1,000 fee. Let's say that that final transaction, was the last one. That $1,000 transaction was the last one that day. That one kicked you into a negative balance, which then triggered overdrafts. What banks would do is they would take that one and process it first before your lattes and that would kick all five of those transactions into overdraft. That's really bad behavior and, in my opinion, besides this most recent case of Wells Fargo, that was really the worst thing that banks have been doing to consumers.

If you go back to around the internet bubble, all of the big banks' analysts were pumping stocks that they shouldn't have been, that they were purposely inflating the price estimates on and being overly optimistic about them in order to get clients for their banks. They were basically throwing the retail customers out in order to get wholesale customers. They had all the mortgage stuff that you were talking about. The mortgage stuff was really bad because the mortgage servicing behavior that the banks were engaging in after the financial crisis, not only kicked people and families out of their homes, but ruined their credit scores. They would go in and wrongfully, in fact illegally, foreclose on people with fraudulent banking documents. Again, this is not just one bank. All the big banks were doing this kind of stuff.

To your point, Gaby -- you'll probably ask about this in a second -- what are banking customers supposed to do? Right? If you're a Wells Fargo customer, where are you going to go? Because every other bank seems to be doing the same type of stuff.