What Wells Fargo’s Survival After Defrauding Millions Tells Us About the Free Market: It Isn’t Enough to Stop Misconduct

by Jeff Sovern

As well-covered on this blog and elsewhere, Wells Fargo employees opened millions of sham accounts for customers, for which they have paid fines and suffered reputational damage. During the House Financial Services Committee September hearing on the Wells fiasco, some Republican committee members berated Wells Fargo's then-CEO, John Stumpf, for giving ammunition to supporters of regulation.  In contrast, the committee's chair, Jeb Hensarling, said that while he didn't believe in companies, he did believe in free markets.  So how has the market treated the bank? Well, here's what Brian Tayan posted in December at the Harvard Law School Forum on Corporate Governance and Financial Regulation:

The long-term impact on the bank was unclear. Customer visits to branches declined 10 percent year-over-year in the month following the scandal. Credit card and debit card applications also fell. Deposits and new checking accounts, however, continued to grow—albeit at below-historical rates.

And here are some excerpts from a January 13, 2017 news release reporting on Wells's income for 2016:

Net income of $5.3 billion, compared with $5.6 billion in fourth quarter 2015.

* * *

Total average deposits for fourth quarter 2016 were $1.3 trillion, up 2 percent from the prior quarter, driven by both commercial and consumer growth.

In other words, the free market is not doing much to punish Wells. While it is impossible to know if Wells would have done even better in the absence of the scandal, Wells does not seem like a company on the brink of failure.  True, the free market may yet catch up with Wells, but it seems far more likely that consumers inclined to move to other banks would have done so last summer or fall, when the scandal was the subject of frequent news coverage, than now, when Wells has largely fallen out of the news cycle. And just to be clear, this is not a situation of the government propping up a too-big-to-fail bank.  Far from helping Wells, the government fined Wells and gave its bad conduct publicity. It's not the government opening up those new accounts; it's consumers.

So regulators have actually done quite a bit to discipline Wells for its misconduct while the free market has dropped the ball.  Why then, would Jeb Hensarling and his colleagues want to limit the power of regulators and leave discipline to the free market?  In his terrific new book, Economism (about which I expect to post more another time), Connecticut law professor James Kwak suggests that economism is a religion-like ideology that adherents use to justify opposition to regulation.  Chairman Hensarling believes in free markets even when the evidence is that the free market failed. 

Just to be clear, I have no desire to see Wells shut down or suffer significant reverses. I just want it appropriately disciplined for defrauding consumers, forced to compensate injured consumers, and deterred from similar conduct in the future.  Until regulators got involved, none of that seemed to be happening.  The free market dropped the ball on this one. In fact, as far as I know, the free market did nothing at all until Wells's misconduct was publicized by regulators.

Why haven't consumers abandoned Wells? I've heard it suggested that consumers don't like to switch bank accounts because they incur transaction costs in also switching direct deposits, automatic withdrawals, etc. (I'm not sure of my source for that and so can't attribute it; if you know of a source, please let me know in a comment). That may account for part of it, but it wouldn't explain why accounts are growing.  But for purposes of this discussion, it's not necessary to explain why consumers haven't punished Well; it's enough to note that they haven't.  In other words, despite perhaps the biggest retail banking fraud since the Great Recession, we can't depend on the free market to discipline financial institution misconduct.  Yet another demonstration of why we need strong, independent regulators–exactly what the Republican Congressmen who placed ideology ahead of helping consumers feared.


0 thoughts on “What Wells Fargo’s Survival After Defrauding Millions Tells Us About the Free Market: It Isn’t Enough to Stop Misconduct

  1. Mark E Budnitz says:

    Why consumers don’t close their accounts at Wells & go to other banks: The following sources do not specifically focus on Wells Fargo, but the findings likely apply to Wells as well as others. Some banks refuse to close accounts because transactions are pending or the consumer must first pay overdrafts. Letter from national consumer organizations to prudential regulators, Sept. 29, 2014. A Consumers Union study found that closing an account at one bank and opening one at a new bank can be complicated and confusing and can take months. “Trapped at the Bank: Removing Obstacles to Consumer Choice in Banking” (2012). Many consumers have complained to the CFPB about errors in their credit reports that made it difficult to open a new account. Monthly Complaint Report, August 2016. In some rural areas and low income neighborhoods, there few, if any banks. Bass & Anderlik, “The Future of Banking in America: Rurual Depopulation….” FDIC, Jan. 2005. Bass & Campbell, “Predator Targets Hit as Banks Shut Amid Profits,” Bloomberg, May 2, 2013 (banks shut 1,826 branches between late 2008 and 2013, 93% in low income postal zones).

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