September 15 will mark the eight-year anniversary of D-Day in the global financial crisisthe morning that markets around the world learned how much the housing-debt implosion would permanently alter the financial industry landscape.
The language of the financial markets changed that day too, when we learned what the words too big to fail would mean to the largest U.S. banks.
One of those too big to fail banks–Wells Fargo–was right in the heart of the storm those days. But eight years on from the worst of the financial crisis, the too big to fail rules seem to have allowed Wells Fargo to run an extensive fraud scheme on its customers without much fear about the consequences.
Its clear from both the pervasive abuse of trust Wells perpetrated on its customers and the wrist-slap punishment it received from the U.S. government that problems continue to exist at the top of the U.S. banking system. We havent truly fixed the too big to fail problem. That should be a warning signal to investors about the ongoing fragility of the financial markets.
Trust was broken by Wells Fargos hard-driving cross-selling culture, where associates were pushed to meet sales targets for new accounts from existing customers. The strategy was undoubtedly a success for Wells and its shareholderson average a Wells consumer household held 6 accounts with the bank, and Wells Fargo emerged as the largest bank by market capitalization.
Now we know more about the path Wells took to the topopening 2 million fake accounts in its customers names, even creating false PINs for many these accounts. Some bank employees even transferred funds between accounts without customer knowledge or authorization.
The bank was slapped with a $185 million fine from federal regulators, and has taken action on its own to fire 5,300 employees who were implicated in opening these sham accounts. These punishments are severeor would be to any other banking institution except one of the size of Wells Fargo.
A $185 million fine is a drop in the bucket for a company with $5.6 billion in net income for just the 2nd Quarter of 2016. And the 5,300 terminated employees represent around 2% of Wellss 268,000-strong workforce.
For a mid-size American bank, 5,300 workers would be the entire company, and a $185 million penalty would likely put a significant dent in their profitability. But Wells Fargo is so large that these sanctions wont even register on their radar. The damage will be much more extensive to the banks reputation in the marketplace, not only with customers but investors as well.
The entire Wells incident says a lot about how far weve come in 8 years with too big to fail banks. The six largest U.S. banks–JPMorgan Chase, Citibank, Bank of America, Morgan Stanley, Goldman Sachs, in addition to Wells Fargodwarf the rest of the banking industry in terms of market cap, customer accounts, deposits and market influence.
Should any one of these banks fail, a catastrophe of unprecedented proportions will likely result. So all of the effort that when into writing new regulations to prevent too big to fail banks from wrecking the U.S. economy has largely been ineffectual.
We need a healthy and well-run U.S. banking system. The stories of widespread malfeasance at one of the U.S. banking giants calls into question how healthy and well-managed these institutions really are.
Given the fragile state and uncertain conditions of the dominant financial market players, wealthy investors should continue to position their holdings with an eye on preservation and protection of value.