Wells Fargo CEO John Stumpf cowered before the Senate Banking Committee, telling Sen. Elizabeth Warren and the other members he was “deeply sorry” for his bank’s absolute fraud in creating over 1.5 million accounts for customers without their permission.
The bank fired over 5,000 employees over the last few years for opening the fraudulent accounts in order to meet quotas. During the same period, Carrie Tolstedt, the executive who ran the retail division where the fake accounts were created, received vested equity and retirement packages worth $94 million over her career, according to The Washington Post. (Rollcall cited the value as high as $124.6 million.)
Tolstedt resigned in July.
Last week, Wells Fargo agreed to pay the federal government, along with the county and city of Los Angeles, $185 million to settle a lawsuit and as a penalty for its malfeasance. But the feds should have been aware of what was going on, according to Senate Banking Chairman Richard Shelby, a Republican from Alabama.
“Where were the federal regulators?” Shelby asked. Since the practice dated to at least 2010, “Why did it take an LA Times report to uncover what should have been uncovered by regulators?”
The Consumer Financial Protection Bureau was created by the massively complex Dodd-Frank Wall Street Reform and Consumer Protection Act. No single law has directly affected consumers as much since Richard Nixon ended the gold standard.
But Democrats want to go further than simply fixing the CFPB’s oversight. Warren wanted Stumpf’s head on a platter.
“What have you actually done to hold yourself accountable? Have you resigned as CEO or chairman of Wells Fargo?” Warren asked in her opening exchange with Stumpf, interrupting him when he tried to give an answer.
“Have you returned one nickel of the millions of dollars that you were paid while this scam was going on?” she pressed on.
Then she crowed, “The only way that Wall Street will change is if executives face jail time when they preside over massive frauds.” Since the settlement with Wells Fargo stipulated that the bank would not admit wrongdoing, jail is off the table. But Warren wants to force the bank’s board to use their power to “claw back” some of Tolstedt’s (if not Stumpf’s) compensation.
From the Washington Post:
Divesh Sharma, a professor of accounting at Kennesaw State University who studies clawbacks, says that if the bank decides to claw back any executive pay, “they’ll be opening themselves up to potential litigation. Clawing back is interpreted as a sign of something going wrong.”
If Wells Fargo didn’t admit wrongdoing to the government, why should they open themselves up to it by executing a “claw back” on their executives? They might do it anyway, to forestall some proposed rules emanating from Dodd-Frank which would empower the government to force “claw backs.”
[Alan Johnson, managing director of pay consultant Johnson Associates] fears clawbacks could become politically driven and, while well-intentioned, could have unexpected consequences. “If you make the penalties strenuous enough, when honest mistakes happen, people are going to try to cover them up,” he said.
Johnson is correct to fear this. Once power to set executive compensation–or withhold it–is ceded to the government, companies will never be free to compete in the market again. Those socialist liberals who believe that CEO pay should be restricted to some multiple of the lowest paid worker will use that principle to stunt growth, and cause companies to relocate off shore.
Handing authority to force “claw backs” and regulate corporate executive compensation to federal regulators is the worst idea since Hugo Chavez nationalized Orinoco oil in Venezuela. That caused Exxon Mobil and ConocoPhillips to exit the country. Now, Venezuela is a broke, starving, third world backwater when it used to be a thriving OPEC powerhouse.
I’m not implying that the U.S. economy will collapse if these regulations come to pass. But the chilling effect on entrepreneurship, capital investment, and talent recruitment for America’s top companies will certainly be felt, and not just by the top executives. The fish stinks at the head, and if executives like Stumpf hand control of their compensation to the government, we will have less capable people running our best companies.
The next CEO may not catch the corruption, and it will simply continue right under the noses of the hapless CFPB, FSOC, and the rest of the alphabet soup of regulators that do nothing but add costs to every company in the country. The first clue it’s a bad idea is that liberals like Warren want it to happen.
Did I mention this is a bad idea?