Back in the 1500s, a financial agent of Queen Elizabeth I named Thomas Gresham observed that that “bad money drives out good.” That is, if two kinds of money are circulating at the same legal value, people will spend the lower-quality money and save the higher. The latter as a result ceases to circulate. This became known as Gresham’s law.
More recently, in our book The Money Bubble, James Turk and I extended this concept to bankers, observing that in times of very easy money, bad bankers drive out good:
Pretend for a moment that you’re an honest banker; think Jimmy Stewart in It’s a Wonderful Life. The government is creating lots of new dollars and making them available to you, so you have plenty of capital with which to make loans. But you’ve already given loans to pretty much every creditworthy customer you can find.
Because you’re reluctant to lend to people who probably can’t pay back a loan, your impulse is to slow down, scale back lending and wait until the economy starts generating more creditworthy borrowers.
But that means giving up the fees generated by new loans which less scrupulous bankers are more than willing to write. Other banks become more profitable than yours, and your board of directors begins to question your competence. The make it clear that if your results don’t improve they will 1) replace you with a more aggressive (though they use the word “innovative”) executive from a more profitable bank or 2) sell your bank to one its fast-growing competitors.
Our good banker then has to decide whether to abandon his career or start behaving in ways that he finds unwise and/or unethical.
This brings us to Wells Fargo, which just agreed to pay a $1 billion fine for past financial crimes.
Here’s how it happened, from a 2017 Vanity Fair article:
Once upon a time, in 1970, long before America’s banking system was dominated by six giant institutions—JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Goldman Sachs, and Morgan Stanley—Dennis Hambek started working as a messenger at the National Bank of Washington in Ellensburg, Washington. Over the years, as his career advanced from messenger to loan officer to branch manager, he had a front-row seat at the transformation of America’s banking system. That first year, the National Bank of Washington was swallowed up by Pacific National Bank of Seattle, which in 1981 was bought by Los Angeles-based First Interstate Bancorp, which in 1996 was bought by San Francisco-based Wells Fargo, which in 1999—as the consolidation frenzy was reaching its peak—merged with Norwest, a Minneapolis-based bank, in a $34 billion deal.
Wells Fargo, which was founded in 1852 as a stagecoach express to carry valuable goods to and from the gold mines in the West, had a storied brand, so the new, combined company kept that name. But if Norwest’s name didn’t survive, its corporate culture did. Spearheaded by the company’s then C.E.O., Dick Kovacevich, it involved a novel way of thinking about banking.
As Kovacevich told me in a 1998 profile of him I wrote for Fortune magazine, the key question facing banks was “How do you sell money?” His answer was that financial instruments—A.T.M. cards, checking accounts, credit cards, loans—were consumer products, no different from, say, screwdrivers sold by Home Depot. In Kovacevich’s lingo, bank branches were “stores,” and bankers were “salespeople” whose job was to “cross-sell,” which meant getting “customers”—not “clients,” but “customers”—to buy as many products as possible. “It was his business model,” says a former Norwest executive. “It was a religion. It very much was the culture.”
It was underpinned by the financial reality that customers who had, say, lines of credit and savings accounts with the bank were far more profitable than those who just had checking accounts. In 1997, prior to Norwest’s merger with Wells Fargo, Kovacevich launched an initiative called “Going for Gr-Eight,” which meant getting the customer to buy eight products from the bank. The reason for eight? “It rhymes with GREAT!” he said.
This slogan, however, as experienced by bankers on the ground such as Hambek, was more hard-core than hokey. “We had a lot of longtime customers and a good staff, but the sales pressure kept mounting, mounting, mounting,” Hambek says. “Every morning, we had a conference call with all the managers. You were supposed to tell them how you were going to make your sales goal for the day, and if you didn’t, you’d have to call in the afternoon to explain why you didn’t make it and how you were going to fix it. It was really tense.” Achieving sales goals wasn’t easy. Ellensburg is a small town, and there were seven other banks.
That’s when Hambek began to see things that shouldn’t have been happening: bankers persuading customers to take out large loans and then immediately repay part of them so that the banker could get credit for the bigger loan, for instance. In the summer of 2005, a customer named Bill Moore complained to Hambek about a checking account and a savings account—that he had been given but hadn’t asked for and didn’t want. Hambek investigated and discovered that the banker who opened them had entered Moore’s driver’s-license number as “MOOREWF00000” and the date of issuance as January 1, 2000, a holiday when the Washington State Department of Licensing would have been closed, as shown by documents first obtained by Vice News.
“Gaming,” which was defined in the Wells Fargo Code of Ethics as “the manipulation and/or misrepresentation of sales or referrals . . . in an attempt to receive compensation or to meet sales goals,” was supposed to be a big no-no, so Hambek called the Wells Fargo EthicsLine, and he told his supervisor what he’d found. “I said, ‘This is blatant gaming,’ ” he recalls, but nobody seemed to care. Later that summer, after 35 years of service, he retired in order to avoid being fired for lack of productivity.
This was flat out criminal behavior. But it’s only slightly worse that other practices that have become pervasive among Wall Street banks in an era of ultra-easy credit. Subprime auto loans offered to people who should not be driving a new car, student loans granted to kids pursuing degrees that will never generate the money to pay them off, sales of exotic derivatives to pension funds so desperate for yield that they’ll take a chance on things they don’t understand, the list goes on. But the source of most of it can be traced back to inflation as official government policy and artificially-low interest rates around the world.
No wonder that everyone is doing it; all the good bankers were forced out years ago.