(Bloomberg) The Wells Fargo fake-accounts scandal is one of the highest-profile cases of banking villainy since the financial crisis, but it is an odd kind of villainy. If you were a cartoon-villain banker, this is pretty much the last thing you would do. Wells Fargo’s retail bankers were under a lot of pressure to open accounts, so they responded by opening fake accounts.
This angered customers and the public, but it’s not like it did Wells Fargo any favors. Wells Fargo’s goal in pressuring its employees to open lots of accounts for customers was to open lots of real accounts, to get customers to make deposits and take out loans and do transactions and generate revenue for Wells Fargo.
The thing about fake accounts is that they mostly don’t bring in any money: At least 95 percent of Wells Fargo’s fake accounts brought in zero dollars, while the rest seem to have brought in about $2.4 million in fees, a rounding error for a bank with $88 billion of net revenue last year, and orders of magnitude less than the fines Wells has had to pay. The fake-accounts scandal is not a story about a clever greedy bank exploiting customers for money; it is a story about a dumb greedy bank with poorly designed incentives and inadequate supervision harming customers without making any money.
In fact, if you wanted to, you could describe the fake-accounts scandal not as a scam that Wells Fargo pulled on its customers, but rather as a scam that Wells Fargo’s employees pulled on Wells Fargo. The customers got fake accounts, which in some cases affected their credit scores or cost them money in fees, but which in most cases didn’t affect them at all.
Meanwhile Wells Fargo wanted to sell more products to make more money, and told its employees to sell more products, and paid those employees because it thought they were selling more products, but in fact those employees were secretly not selling products at all, and were defrauding Wells Fargo by taking paychecks for work they weren’t doing.
Perhaps Wells Fargo—or at least its senior leadership—deserved to be scammed, in some sense, because its sales targets were unrealistic and its demands were excessive. But when they opened fake accounts, Wells Fargo’s bankers weren’t so much lying to the customers as they were lying to Wells Fargo.
Obviously nobody wants to describe the fake-accounts scandal this way! While most customers weren’t harmed, some were, so you can find real human victims.
Meanwhile Wells Fargo is not a particularly attractive victim, being a big bank.
And Wells Fargo’s retail bankers are not particularly attractive villains, being relatively low-paid workers who faced grinding pressure to cross-sell constantly in a culture that seems to have encouraged dishonesty and punished whistle-blowers.
“The real crime here is that low-level retail bankers set up fake accounts in order to scam Wells Fargo out of their modest paychecks” just doesn’t work as a story of the scandal, even if there is a certain partial truth to it as a mechanical matter.
On the other hand yesterday the attorney general of New York announced a $65 million settlement with Wells Fargo over the fake accounts. And while Wells Fargo’s previous settlements—with the Consumer Financial Protection Bureau, the Los Angeles city attorney and the Office of the Comptroller of the Currency—were about the harm that Wells Fargo did to consumers, this one is about the harm that Wells Fargo’s employees did to Wells Fargo’s owners:
Wells Fargo failed to disclose to investors that the success of its cross-sell efforts was built on sales practice misconduct at the bank. Driven by strict and unrealistic sales goals, employees in Wells Fargo’s Community Bank division engaged in fraudulent sales practices, including the opening of millions of fake deposit and credit card accounts without customers’ knowledge. Through a significant incentive compensation program, employees who met these targets were eligible for promotions and bonuses, while employees who did not meet the sales targets faced relentless pressure and even termination.
Today's settlement notes that Wells Fargo made numerous misrepresentations to investors over many years, and failed to disclose its knowledge of systemic problems pervading the bank’s sales practices…. Wells Fargo failed to disclose to investors the misconduct at the heart of the bank’s vaunted cross-sell business model. When the truth was publicly disclosed, New York investors lost millions of dollars.
The point here is not that consumers were harmed when Wells Fargo set up fake accounts for them. It’s that Wells Fargo’s investors were harmed when Wells Fargo told them it was setting up accounts for lots of customers, while in fact those accounts were secretly fake. The shareholders, on this theory, thought that Wells Fargo’s vigorous cross-selling would bring in revenue, but in fact it just brought in fines.
Everything, I like to say, is securities fraud: If a public company does a bad thing, or has a bad thing done to it, then whatever else that is it is securities fraud, because the company probably didn’t disclose the bad thing to shareholders the moment it happened.
I often find this troubling, because it treats shareholders as victims of corporate misconduct even when that misconduct benefits them. State attorneys general argue that oil and coal companies mislead their investors about the effects of climate change, accusing them of securities fraud instead of pushing for stricter environmental regulation, which creates the weird sense that the primary victims of climate change are, like, Exxon shareholders.
I also find it troubling because, if you really did think that the shareholders were the primary victims of the corporate misconduct, it would be weird to protect them by fining the corporation. The shareholders (sort of) own the corporation; taking money from the corporation is like taking money from them.
In the case of Wells Fargo, though, I suppose it’s possible that the attorney general thinks the shareholders really were the victims.
They didn’t benefit from the fake accounts, and it is not crazy to say that they were harmed by Wells Fargo’s mismanagement. You still have the second problem though: Fining Wells Fargo takes money that could otherwise go to shareholders, and the money is going to New York State, not to the shareholders.
Elsewhere, here is an argument from Mike Konczal that “to stabilize our economy, we should unionize the financial sector”:
Why not unionize the financial sector as part of a reform agenda? This idea of “regulation from below”—a strategy coined by labor activists Stephen Lerner, Rita Berlofa, and Molly McGrath—would be an important fix.
You can see how bad working conditions lead to bad behavior by looking at what went wrong at Wells Fargo. The bosses there insisted that workers meet punishing sales goals. They demanded that their employees sell customers additional products they didn’t need, like car mortgages or home loans. This created an environment where workers felt compelled to create fake and unauthorized accounts to reach these corporate benchmarks—the kind of abuse that could easily be checked if employees had a say in their own working conditions.
But Wells Fargo is I think a pretty weird example of bank misconduct, though a famous one. In Europe, where there are more worker protections, the result is often that bankers who are fired for even pretty egregious misconduct sue, sometime successfully, to get their jobs back. It is not clear that, if bankers had a say in their own working conditions, they would use that say to make banking nicer and less risky, or that, if it was harder to fire bankers, they would take fewer risks.
Everything is seating charts.
If you are a sales and trading intern at an investment bank, you’re mostly not, you know, putting together billion-dollar deals on your own. Your job is basically to follow around working traders and salespeople to figure out what they do, and hopefully get them to like you enough to give you a full-time job.
Practically speaking this means that you don’t have much use for a desk, much of the time. You might want a chair, though, so you can sit behind the traders and watch them. But since you’ll sit behind a lot of different traders, it helps if the chair is light and portable and folds up for easy transport.
Making the interns carry folding chairs around can also feel like a mild form of hazing, which I gather most traders would view as an additional advantage.
Anyway here is a story about Goldman Sachs Group Inc. making its trading interns carry around folding chairs, and while I am not sure that I believe everything here, it is too funny not to pass along:
Capital can report that not only are interns still having to fight for chairs but the seating stunt has intensified and got weirder in recent years. "The area on the trading floor where interns gather is now called "the swamp", says a former Goldman trainee. "Human Capital Management [what Goldman calls its HR department] leaves small red plastic chairs, shorter than those used on the trading floor, for interns to carry round when they shadow traders. There are not enough chairs to go around and Human Capital Management keeps tabs on who is able to secure them and who isn't."
Don’t get me wrong, I can easily believe that the traders are going around telling the interns “we intentionally have too few chairs, and only the interns who are strong and brave and devious enough to get chairs will get hired.” But that sounds more like just a funny thing you tell interns than an actual hiring policy.
Being able to find a chair does not, it seems to me, have much predictive value for identifying talented traders.
Perhaps I am naïve, though, or just out of date.
The business world is moving toward open-plan offices with flexible seating arrangements. In the not too distant future, everyone might have to engage in a bitter Darwinian struggle to sit down every day of their working lives. Perhaps the main criterion in hiring for all jobs really should be the ability to find a seat.
The opposite.
One of my favorite finance stories this year was about DUMB, the imaginary ticker for “a ‘basket of deplorables,’ an index made up of the outcasts of the smart-beta world.” The idea is that there are many factor-based investing strategies, and each of those strategies selects some basket of stocks that screen highly on some particular factor (value, momentum, dividends, low volatility, etc.), but there are a few stocks that don’t have very much of any of the popular factors, and so they do not get included in any factor-oriented exchange-traded funds. And if you just screen stocks for the no-factor factor, you get a weird anti-factor-based index, and … it performs pretty well?
I mean, sort of, the performance backtest is not especially convincing, but the intuition is funny and just-about-possible: If factor investing in general is a bit faddish, and if factor ETFs are a bit overcrowded, then the no-factors factor is a crude way to identify undervalued stocks that the popular approach has missed.
In other news, here is Cliff Asness on “The George Costanza Portfolio.” Asness’s firm, AQR Capital Management, has had a rough year, so he is rethinking things a little:
In general we believe in choosing individual stocks with good value, good momentum (both price and fundamental), low risk, high quality (e.g., profitability, margins), and positive views from those we think are “informed investors.” We like to under-weight or sell their opposites. When it doesn't work, or even hurts a lot for a while, we don't suddenly prefer expensive stocks with bad momentum, high risk, low quality, and negative views from informed investors. …
In one episode of the greatest sitcom ever, George Costanza, a perennial loser at all things (love, work, etc.) decided he must, in all things, “do the opposite” of what he’d normally do, as his normal way clearly wasn’t working out for him. From big decisions all the way to actions as small as what sandwich and hot beverage to order, he would do the opposite of what his every instinct told him to do. So, our clients’ great suggestion was for us to illustrate the results of our own personal “Costanza” portfolios. In other words, let’s examine what it would look like if we ignored my comment above when I said, for example, “we don't suddenly prefer expensive stocks with bad momentum, high risk, low quality, and negative views from informed investors.”
The actual construction is a little cheap—basically it creates a hypothetical inversion of AQR’s portfolio “if every long position was an equal magnitude short, and vice versa,” which is perhaps not exactly how you’d go about building an expensive/bad-momentum/high-risk/low-quality portfolio if that was really your goal. (Wouldn’t you make every long position a short of the magnitude of your actual shorts, and the shorts longs of the magnitude of your longs? Or would you not short at all, because you wouldn’t have the same long/short instinct that AQR has?) There is some judgment involved in doing the opposite of your instincts. When George is doing the opposite on “Seinfeld,” he orders chicken salad on rye instead of his usual tuna on toast. He doesn’t order raw calf’s brains or ball bearings or strychnine, or bring a tuna sandwich to the diner and demand to be paid for it.
As it is, AQR has done well over time and poorly recently, so the anti-AQR has, unsurprisingly, done poorly over time but better recently. Fine. It’s a quick blog post. But what one wants is not so much “what does the opposite of our actual portfolio look like” but rather “what portfolio would we have if we were the opposite sorts of people—or at least, had the opposite sorts of financial models—from what we actually are?” If you were a person with the opposite instincts, and you were genuinely designing a portfolio to make money on those instincts, what would it look like? Might it be as good as your actual portfolio, but in an opposite way? Might it be something like DUMB? More generally, are there multiple opposite ways to make money, multiple opposite approaches to construct portfolios that all go up, or is there only a correct approach to building an efficient portfolio, and a bad portfolio that is the opposite of that?
Tesla Twitter.
Well sure:
Tesla Chief Executive Elon Musk said Twitter had temporarily locked his account after thinking it had been hacked.
Musk is one of the social media platform’s highest profile tweeters and frequently uses the platform to post updates on his companies. He intermingles material posts with random musings and personal reflections. Several hours before posting that Twitter had been worried about his account, he tweeted manga images and asked if users wanted to buy Bitcoin.
Tesla’s stock was up 20% on the news. No, I kid, this happened after yesterday’s close, and he’s unlocked again now, so there was no time for his Twitter suspension to affect the stock, and I’m sure there will be plenty of fresh horrors today. If I were a Tesla shareholder I’d report Musk to Twitter every day to try to slow him down.
