The financial crisis of 2008 led to the economic downturn all over the world. People witnessed the downfall and bankruptcy of huge financial institutions like Lehman Brothers, Merrill Lynch and several other key members of the fraternity. Before 2008, American banking system was based on junk loans or subprime mortgages which were given to people who couldn’t afford to repay and were potential bad debts for the organizations but companies continued giving out loans without any scrutiny which eventually led to a disaster in the housing industry as well as the consumer market. Banks were completely helpless because their assets were tied up in tangible properties which had no potential buyers in the market, leading to cash flows problems. Wells Fargo was one of those banks which managed not only to survive through economic wreckage but also expanded to a humungous level during this period.
Wells Fargo is one of the largest American financial institutes with an asset base of around $1930 billion in the United States of America. Wells Fargo is one of the biggest beneficiaries of post 2008 economic crisis. The important question is how did Wells Fargo transform the economic slump into financial returns for itself. The bank was involved in cross selling its profitable products to the consumer base with or without their consent which led to their deposits being consolidated throughout the crisis period. During the year 2008, the strategic aim of every institution in America was to survive and Wells Fargo planned a similar objective for itself except that the means it chose for survival were unethical and criminal. The Executive body of the bank pressurized its salesmen to surpass their sales quotas so that the cash inflow can bolster the company’s financial structure. During the time, most of the banks and companies resorted to the decision of dismissing their employees and even delayering entire levels of organizational hierarchy to cut down costs and save retained revenues. Employees at Wells Fargo faced a similar dilemma where they could either persuade their financially weak customers with their services and accept the inability of consumers to buy any of the products, or trade through customer accounts without their knowledge so that their jobs could be saved. The fear of getting unemployed led to the employees towards the astray path of undertaking fraudulent banking transactions on behalf of their clients who were unware of the activities. Salesmen started to open fake accounts in the bank which people were unaware of and the top management closed its eyes upon. It must be kept in mind that the flow of money was real but the accounts used for deposits or withdrawals were fake and made by the employees. Upon enquiry, the real customers were misguided regarding the transactions, they were told that the withdrawal was for bank charges, credit card fees, or overdraft costs. The top management of Wells Fargo continued to exert pressure on its employees to increase the deposit base of the company and encapsulated the strategy of Gr-eight initiative into their agenda which made it a compulsion for each sales person to sell on average 8 financial products to their existing customers instead of the previous benchmark of average 6 products. The CEO, John Stumpf, supported the notion that ‘eight is great’ and his consent was an order for the workforce. To secure their jobs, employees took decisions that were morally incorrect, unethical, and even criminal in the eyes of law. It was impossible to sell financial products to the customers because the new loans to large borrowers fell by 47% during the financial debacle of 2008 and this affected the entire cash flow cycle in the economy. Soon, customers grew suspicious of the activities in their bank accounts and an investigation was ordered against Wells Fargo to audit its internal and external business activities. The audit report was eye-opening and it was soon discovered that the company was involved in fraudulent activities that ensured its survival and growth during all these years of economic instability and financial unpredictability. When the matter of fake accounts was further probed, it was discovered that from 2011 to 2016, the employees created around 1.5 million short-lived fake accounts for transactions and issued more than 500,000 credit cards to non-existent people. These fake accounts and illegal banking services yielded around $2.5 million for the banks in terms of bank charges, credit costs, and other expenditures pertinent to the products. In 2015, a lawsuit was filed and the company is till date facing issues related to customer compensations, law violations, and media investigations. As the Federal government got involved in this issue, John Stumpf was forced to resign as fears grew that his presence would hamper the process of justice in this case but he refused to comply with any such demands made by the press or senators. Wells Fargo assured the Public Accounts Committee and other state institutions that a compensation of $185 million would be paid to the affected stakeholders but as the matters proceeded, things got worse for the bank. John Stumpf tried to subside the matter by apologizing and ending the policy of sales quotas in the bank. The justification given by Wells Fargo have been its dismissal of more than 5300 unethical employees in the past years following this scandal. On October 2016, John Stumpf succumbed to the pressure of the Senate and Investigative agencies, and finally stepped down from the position of CEO and Chairman of the board. Financial analysts have little hope that John Stumpf’s case would be given any attention after some time because the amnesty given to the rulers of Walls street and culprits of financial crisis of 2008 set a wrong precedent for such banking frauds.
We see the shattering of ethical principles in the corporate world but who actually is responsible for the collapse, were the salesmen solely responsible for their unlawful approach or was it the higher management that turned their eyes from the unethical activities taking place under them. It was Wells Fargo’s decision to either follow the lawful path and operate in the market or lead themselves to the astray path and indulge themselves into malpractices.