> Posted by Elisabeth Rhyne, Managing Director, CFI

When my son Gordon went to the senior prom in his rented tuxedo, he and his girlfriend were a gorgeous sight (see photo). Next day, he was supposed to return the tuxedo, but he couldn’t find one of the patent leather shoes. On the day after that the rental shop called me to complain that the tuxedo was late. Gordon said he had already returned it. I told the shop there must be some mistake. This went on for several days, Gordon insisting he had returned the tux, while I defended him to an increasingly irate tux shop. After a week, I went looking and found the tux stuffed into the bottom of a backpack, along with the shoe.

I came down pretty hard on Gordon for that. Why would an intelligent young man lie repeatedly to his parents over a simple problem that was not going to disappear? Why didn’t he admit the problem on day one instead of digging himself into a deep hole? Why didn’t he take the obvious action of searching for the tux? He paid a big late fee, but the damage to our trust in him was far worse.

I’m telling this story because it reminds me of the executives at Wells Fargo Bank. The CFPB has just come down pretty hard on the bank for opening unauthorized bank and credit card accounts for 2 million customers in a practice involving over 5,000 members of its staff. As a result, the bank is now suffering a $185 million fine, the firing of thousands of staff, and, in all likelihood, a major loss of customer trust.

According to press accounts, this problem began to surface several years ago – perhaps as early as 2011, and was clearly identified at least by 2013. The questions I have about this are directly parallel to the questions I asked Gordon. Why didn’t executives at Wells Fargo admit early on that they had a problem? Why didn’t they take steps to investigate it fully and fix it? Did they think it was going to go away if they ignored it? The practice in question was driven largely by staff incentives for account openings and cross-sales; however, the unauthorized accounts did not significantly benefit the bank itself – only the employees benefitted by claiming to have fulfilled their targets. So why not change the staff incentives and targets? The bank only changed these in response to the current CFPB action. Why didn’t Wells Fargo bring CFPB in as an ally? And why didn’t they realize that the reputation hit would be much worse than any fine?

I may be hopelessly naïve about the challenges of operating a regulated financial institution, but I have always thought that it behooves banks to get out in front of consumer protection issues and work in a cooperative spirit with regulators. I am not sure whether this bank was too intent on profits or whether the regulators are so harsh that the bank feared to work with them constructively. Perhaps both. I have also always naively thought that banks would guard their trust with clients above all else.

I was very angry at my son for lying to me rather than acting to fix a simple problem. But I recognize that sometimes the 18 year old brain responds to problems in irrational ways. What excuse do the executives at Wells Fargo have? I am genuinely at a loss to answer.

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