Monday, May 21, 2018

Wells Fargo And Corporate Ethics

                                                                                                written 21 April, 2018
                                                                                                published  28 April 18

            Ethics are rules we live by which regulate our impact on others.  The Harvard Business School (HBS) has been instrumental in shaping the standards of business, more than any other school.  When it opened in 1908, it was accepted that business had an ethical obligation to society, customers, suppliers, and employees.  But teaching ethics was problematic, and ethical considerations were subordinated over time to more quantifiable factors.  These days, HBS teaches that the only responsibility of business is to maximize shareholder value, disregarding any other consideration.  Wells Fargo Bank is a wonderful example of this limited ethics at work.
            Wells Fargo funds a number of businesses with controversial social benefit.  They support the gun industry by extending credit to the NRA and major gun outlets, making weapons easy to purchase.  They finance the private prison industry.  The US, with 5% of the global population, has 25% of global prisoners, the highest per capita rate.  Annual incarceration costs more than a Harvard education.  Wells Fargo invests heavily in fossil fuels, including tar sands, the least energy efficient fuel, and are funding the construction of the border wall.  While some people may applaud these investments, the bank's treatment of their own customers and employees might give pause to reconsider.
            Wells Fargo contributed to the housing crash in 2007, by certifying over 100,000 loans for FHA insurance between 2001 and 2005, without verify the borrower’s ability to repay these loans.  In 2002, more than 40 percent of the bank’s FHA loans failed to qualify for insurance, but Wells kept the defective loans secret, not reporting a single bad loan.
            After the crash, their mortgage unit made unauthorized changes to loans held by customers already in bankruptcy.  These changes require approval by a bankruptcy court judge, which Wells Fargo did not obtain, putting their customers in danger of defaulting on other commitments they had made to the courts. 
            An investigation in 2013 revealed that, as a result of aggressive quotas by bank managers to increase sales of bank services, bank employees issued credit cards for customers without their consent.  Approximately 85,000 of the accounts incurred $2 million in fees, adversely affecting customers' credit scores.  Employees also create fraudulent checking and savings accounts, and issued unwanted insurance policies. By Aug 2017, the number of unauthorized accounts had reached 3.5 million.
            By law, a bank is supposed to investigate potential criminal activity when a customer complains of fraud.  Instead, the bank closed the accounts and got rid of the customer, who were prevented from pursuing legal action by mandated private arbitration clauses.
            When employees reported unreachable goals, or inappropriate conduct, no changes resulted.  Instead, employees who made such reports were issued performance reviews which indicated that they had been complicit, which created difficulty gaining employment at other banks.
            Last week, Wells Fargo was fined $1 billion for selling un-needed auto loan insurance, and charging home loan borrowers extra fees when applications were delayed by the bank's own procedures.  This is on top of almost $200 million fines for previous frauds. 
            With annual profit of over $5 billion, these fines are manageable, and the recent Republican tax cut covers about half of the recent fine.  Bank executives are confident that fraud will not hurt the company, and no banker has ever gone to jail for their criminal actions.  In the last decade, Wells Fargo lost value from defrauding customers, but is worth over $250 billion, and increased value after the latest fine, suggesting the entire investment community is ethically challenged. 
            Wells Fargo is just one example of corporate ethics and dualistic economics, which maximizes profits for a few, without regard for the impact on anyone else.  Big banks feel customers have very little choice, as it is complicated to shift to another bank, and other big banks may have the same limited ethics.  But instead of feeling disempowered, we can vote with our money.  We don't have to do business with criminal enterprises, but can shift our funds to a local bank or credit union.  California is considering establishing a state charter bank to address the needs of the marijuana industry, which will give another viable financial alternative.