Wells Fargo, Fraud, and Congressional Math

Which is larger, $28 billion or $7.6 million?

It’s not a trick question. But judging from their recent priorities, many members of Congress are likely to get it wrong.

Indeed they would confidently assert that $7.6 million is a massive amount, while $28 billion is hardly anything at all.

What are these numbers? Well, $7.6 million is the cumulative amount of money that Wells Fargo appears to have taken from customers by fraudulently opening accounts and charging them fees. Meanwhile, $28 billion is a rough estimate of how much savings interest has been denied to Wells Fargo customers, in a single year, as a direct result of the Federal Reserve’s loose monetary policy.

For its machinations, Wells Fargo has rightly been in the headlines incessantly, and its executives have faced very critical hearings with Congress.

However, this same Congress refused to pass a bill that would give them oversight over the Federal Reserve and its monetary policy decisions–the same decisions that resulted in the $28 billion estimate above.

What accounts for this double standard in treatment? It’s simple really. One institution is a member of the private sector, while the other is a creature of government. And the government is notoriously bad at investigating itself.

Wells Fargo Scandal

The causes and consequences of the Wells Fargo scandal are fairly straightforward. Like many companies, Wells Fargo offered employees monetary incentives for selling existing customers new products–a new deposit account, a new credit card, etc. The problem is that some 5,300 unscrupulous employees decided to skip the actual selling step, and just create accounts without consent to meet sales goals. The employee would earn their desired commission, and the customer might not notice unless they paid close attention to their accounts. The bank itself would also benefit from this activity, in the amount of fraudulent fees generated less incentives paid out to employees.

Based on the amount of refunds and settlement payments given to customers, the revenue from the scheme appears to have been no more than $7.6 million. But given that Wells Fargo as a whole earned $22.9 billion in 2015, $7.6 million is little more than a rounding error on the company’s financials.

The amounts also appear to have been relatively small when considered on a per customer level. According to USA Today, the average refund given to customers amounted to just $25. This makes sense. Obviously, in order for the scheme to go undetected, customers’ total account balances needed to remain relatively intact. 

Of course, none of this changes the fact that what the Wells Fargo employees did was illegal and wrong. Clearly, they should be prosecuted, and any managers that were involved or tried to cover it up should be held accountable as well.

But the amounts are important because they help put the harm in perspective. Many customers were defrauded, but fortunately, the amounts involved were small.

The Response

In response to the scandal, Wells Fargo was fined $185 million in total by several different regulatory bodies, but it didn’t stop there. On Capital Hill, Senator Elizabeth Warren has been leading the charge against Wells Fargo’s CEO John Stumpf. In a now infamous hearing, Warren called for Stumpf to resign and criticized him for not firing other senior management over the scandal. Warren has also called for criminal investigations by the Department of Justice and the Securities and Exchange Commission. When Stumpf was interviewed by members of the House of Representatives, he received another bipartisan tongue-lashing. Clearly, our good members of Congress are taking this matter very seriously to look out for the public’s best interest. That’s nice to see.

The Federal Reserve

The story of how the Federal Reserve has harmed Wells Fargo customers–and indeed, all other Americans–is a bit more complex. It has to do with monetary policy and interest rates.

Since the financial crisis occurred, the Federal Reserve has used monetary policy tools to reduce interest rates to historically low levels. The Fed reduced the Federal Funds rate–an overnight lending rate between banks–to near zero at the end of 2008 and kept it there for seven years. The Federal Funds rate was increased by 0.25% in December of 2015, and remains at that level today.

The Fed also implemented a controversial policy called quantitative easing (QE), whereby the Fed created trillions of dollars in new money and then used it to purchase US Treasury bonds on the open market. This also helps reduce interest rates across the economy. By increasing the demand for US Treasury bonds, bond prices will rise and yields will fall. In turn, US Treasury yields are used as benchmarks that influence many other interest rates in the economy.

The net result of these policies is that all interest rates in the US are substantially lower. That includes interest rates paid on savings deposits.

And that’s finally where our $28 billion figure above comes in. Back in 2007, before the US economy had fully entered the financial crisis, Wells Fargo was paying its depositors an average 3.41% interest rate according to their 10-K. By 2015, after the Fed’s response to the financial crisis, Wells Fargo was paying its depositors a mere 0.11%. Taking the difference in rates multiplied by Wells Fargo average deposit balances of $855 billion in 2015, we arrive at $28 billion in interest income lost because of the Fed’s policies.

And that’s just at a single bank. Unlike the Wells Fargo scandal, the Fed’s scheme affects customers of every bank. No doubt the amount would grow significantly if the impact on all Americans was taken into account.

Asymmetric Consequences

It may be objected here that low interest rates are not inherently bad–they just create winners and losers. That’s technically true, but the consequences are highly asymmetric.

If interest rates are too high, the losers from such a policy are primarily would-be home buyers and entrepreneurs. People may not be able to afford a house as soon or as large as they would prefer. Unfortunate perhaps, but they can still rent a property until they save up the money. Similarly, aspiring entrepreneurs will find it harder to acquire capital at a reasonable low price. This means only the most promising ideas will be able to acquire funding and some people will be left out.

These outcomes are not ideal, but they are nothing compared to the harms wrought by ultra-low interest rates. Interest rates that are too low deprive people of the ability to make a consistent and safe return on their savings. This can spell financial disaster for retirees and those nearing retirement. They had planned their financial future based on the assumption–reasonable until now–that they could earn some kind of safe return on their money, say 5-7%. If that return cannot be achieved because interest rates are too low on safe investments (certificates of deposit, bonds, etc.), retirees face a very difficult choice: reduce their standard of living, come out of retirement, or try out more risky investments. (For more on this theme, see our related piece “The Federal Reserve’s War on Retirement and Pensions“.)

From this, we see the harm caused by ultra-low interest rates tends to be qualitatively greater than the harm done by very high interest rates.

The Response

Given the Social Security system’s inviolable support within Congress, we’d expect them to agree with our assessment of harm above. For Congress, retirees take precedent over nearly any other interest group.

Thus, the damage caused by the Fed’s policies are both qualitatively worse (average $25 in fraudulent charges vs ruining someone’s retirement plan) and orders of magnitude larger ($7.6 million vs $28 billion at Wells Fargo alone). So Congress must really be up in arms about this one right? I wonder what kind of a diatribe Senator Elizabeth Warren had for them.

Not so much.

Earlier this year, Senator Rand Paul offered up a bill to give the Government Accountability Office and Congress additional oversight and visibility into the monetary policy decisions of the Federal Reserve. A vote was held in the Senate, but sadly it did not pass.

And guess what courageous Senator voted against additional oversight of the Federal Reserve? Senator Elizabeth Warren.

That’s how Congressional Math works. When a private sector institution causes people to lose $7.6 million, it is an outrageous scandal. When a de facto government institution destroys people’s retirement plans and costs them $28 billion, it does not even justify further oversight.

So $28 billion is less than $7.6 million after all. At least in Washington, DC.

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