It's a regrettably familiar story: A former senior employee of a major corporation offers a tell-all account of the inner workings of said icon, offering the public a fascinating but fleeting peek into a world that is normally inaccessible to us. This week, we saw a bit of Wells Fargo's
Well, the Wells Fargo wagon is a-trollin' down...
Jacobson's core allegation is that Wells Fargo actively targeted poor black communities for subprime loans, writing reams of mortgages at terms that were far worse than those for which the borrowers should have qualified. Naturally, Wells Fargo vehemently denies these charges. This is sadly not a new theme. Indeed, I had a colleague in grad school whose exclusive occupation was to help Hispanics recover from similar predation in mortgage lending. We all know how these practices ultimately turned out for the nation's homeowners.
Jacobson lays bare a corporate structure that incentivized redirection of prime loans to the subprime division, and handsomely rewarded loan officers who were able to get borrowers approved, irrespective of their fitness for the loan. I couldn't help drawing a parallel to my first homebuying experience in 2003, when the lender showed up at closing with paperwork for a loan that was $20,000 higher than we had specified. He tried to persuade me just to take the money and spend it on furniture!
All this made me wonder: How much can we ever really know about what's going on within a large corporation? Let's look at some other recent examples.
The Muppet show
Readers will surely remember Greg Smith's recent departure from Goldman Sachs
Huh. Sounds like we could still be talking about Wells Fargo. Smith charges that Goldman Sachs displayed a fundamental disdain for its customers, and sought to make money off them instead of with them. This cannot be a solid, long-term strategy for success. Here again, the company denies everything.
Greasing the Mexican skids
The health insurance racket
About two years ago, I had the privilege of meeting Wendell Potter, former head of communications at Cigna
I am struggling to remember the precise details of Potter's talk these years later, but he said he had been an enthusiastic participant in the system until his come-to-Jesus moment. He went to a state fair at which he saw hundreds of uninsured people queuing up for hours to receive free but substandard medical care, administered out of animal stables. It beggars belief, yet it happens every day.
What's a private investor to do?
These stories can be so discouraging. The odds are so clearly stacked against the individual investor in understanding the fundamentals of these business models. Personally, I want to avoid investing in companies whose value proposition is to sell a shabby product, then do everything possible to withhold that product from its customers. This just cannot be sustainable over time. But how do I know before the scandal blows?
I wish I had easy answers here. I think the key is to practice healthy skepticism at all times. Don't allow yourself to fall into the "darling" trap, where a particular stock can do no wrong in your eyes. Always look under the hood and kick the tires, and do so often. Always ask yourself what could go wrong. It's not fail-safe, but it's a pretty good start.
Now, if you're interested in companies with highly sustainable business models that are built for the long haul, you should definitely read our free report "The 3 Dow Stocks Dividend Investors Need."