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Corporate Rot, From The Top Down

In the closing months of 2008, I received a commitment letter from my main bank, Wachovia, offering to refinance one of my properties so that I could complete some improvements on a different parcel. It was to be a 30-year loan at a then-competitive 4.875 percent interest rate.

But then Wachovia, saddled with souring loans it had acquired when it bought Golden West Financial, ran into trouble and was itself absorbed by Wells Fargo & Co.

Amid the chaos of the financial panic, Wells Fargo seemed to be an island of stability, unburdened by failing residential mortgages. I was happy to proceed with the transaction under the new management – until I heard from them.

Shortly after Wells Fargo acquired Wachovia, my personal banker called me in a state of disbelief. We could close my loan, she said, but only if I agreed to some new terms. Either I would receive a new interest rate of 6.875 percent or Wells Fargo would honor the old interest rate – if I paid six “points” upfront.

A point is 1 percent of a loan’s total value. If you are paying one point on a mortgage, you are usually getting a pretty bad deal. Six points is something that you would expect to be demanded only by someone whose collections department wields baseball bats.

Yet these were Wells Fargo’s new terms. At that point, having made plans based on the prior commitment and knowing the ongoing financial crisis made it impractical to look elsewhere, I closed at the higher interest rate. But rather than pay it off over 30 years, I immediately began making payments on an accelerated schedule in order to dispose of the loan as quickly as possible.

I also reached the tentative conclusion, later confirmed through other dealings with the bank, that while Wells Fargo might be a financially strong institution, it was not one on which I wanted to rely. My attitude towards Wells Fargo ever since has been one I borrowed from Ronald Reagan in his encounters with the Soviets: “Trust, but verify.

So it came as no great surprise to me when Wells Fargo got into trouble for systematically abusing other retail customers by opening accounts on their behalf without their consent.

Federal regulators announced last year that Wells Fargo employees had created approximately 2 million accounts for customers without their knowledge in a systemic problem going all the way back to 2011. Wells Fargo agreed to pay $185 million in fines imposed by the Consumer Financial Protection Bureau, as well as an additional $5 million in customer refunds (of which $3.2 million has been refunded so far). Today the bank still faces over a dozen other investigations, inquiries and lawsuits related to the scandal, CNN Money recently reported. At the end of March, Wells Fargo reached a $110 million preliminary settlement in a class action suit filed by customers affected by the scandal.

This week, the company’s independent directors released a 113-page report that portrayed former Chief Executive John Stumpf as both tone-deaf and willing to protect an irresponsible subordinate, former retail-bank chief Carrie Tolstedt, even after others urged him to replace her. Stumpf resigned in October due to the scandal; Tolstedt had previously “made a personal decision to retire” at the end of 2016, though she ended up leaving earlier than planned. The report also found that improper sales issues within the company began to escalate as far back as 2002, much earlier than the period cited by regulators last year.

The report said that the bank would claw back an additional $75 million of compensation from Stumpf and Tolstedt. This brings the total amount of clawbacks, including previous collections from Stumpf, Tolstedt and other senior Wells Fargo executives, to $182.8 million, according to The Wall Street Journal. Current CEO Timothy Sloan said in a statement, “The Board’s report is a necessary examination of what went wrong in our culture, operations, and governance.”

While Wells Fargo’s problems were clearly widespread, the report lays much of the blame on Stumpf and Tolstedt. “Cross selling” is a routine and expected part of the banking business, but Wells Fargo went well beyond industry norms, setting an internal goal of selling at least eight financial products to each customer – and expecting employees to regularly hit that goal. Besides creating unauthorized accounts for existing customers, employees reportedly created accounts for friends and family members in attempts to satisfy their managers’ demands. The pressure to make sure customers held as many products as possible directly contributed to the unethical behavior that has landed Wells Fargo in legal trouble and cost it the trust of many customers.

Making matters worse, according to the report, was a decentralized structure and a “run it like you own it” attitude toward individual department heads, undercutting accountability. The internal report also criticized the bank’s board for not pushing Stumpf to remove Tolstedt sooner – something of a mea culpa, since all four members of the investigation were on the board prior to the announcement of the settlement with the CFPB.

A rotten corporate culture usually starts at the top. Not that problems cannot occur in very good companies – but such problems, once identified, are usually addressed quickly and systematically. In a bad company, on the other hand, misbehavior will be tolerated or overlooked in favor of perceived short-term benefits.

Abusing a customer is one such sort of misbehavior, and Wells Fargo showed no hesitation in abusing the customers (like me) that it had just acquired from Wachovia. In fact, the bank’s pursuit of its aggressive sales goals reportedly rewarded unethical behavior and led to stress-related problems among its workers and high burnout of new hires, according to some former employees. Several former employees have said they were fired after calling the company ethics line to try to draw attention to illegal or unethical behavior.

Has Wells Fargo reformed itself? I don’t know. I believe in watching what people do and ignoring much of what they say. Wells Fargo’s protestations that it has turned over a new customer service leaf are unproven at this point as far as I’m concerned.

I did have a recent experience that was not particularly promising. Last December, I needed to pay off another credit line that I had opened under Wachovia, and which Wells Fargo subsequently inherited. It took my lawyer and the title closing agent no fewer than seven phone calls and well over an hour just to reach someone at Wells Fargo who could provide the necessary information about how much money to send and where to send it.

The incident illustrates ineptitude, not fraud. But it strikes me that whatever improvements the bank has made, Wells Fargo still has some distance to travel before I would be ready to describe it as “customer friendly.”

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us” and Chapter 4, “The Family Business."

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