Wells Fargo(NYSE: WFC) offered its workers bonuses for cross-selling new accounts and services, which incentivized the pervasive fraud that was recently uncovered.In this segment of the Sept. 14 MarketFoolery podcast, Mark Reeth and Million Dollar Portfolio's Jason Moser weigh in on whether or not this will be a long-term drag on the bank or a short-term blip -- and why.
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A full transcript follows the video.
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This podcast was recorded on Sept. 14, 2016.
Mark Reeth:OK we've got @PIAB70, who asks, "I own Wells Fargo stock. Should I panic or ride it out for the long term?" For those of you who aren't paying attention to Wells Fargo, it's down about 13% year-to-date. Jason, why, and what should we do?
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Jason Moser: Well, we've talked about this a little bit. Motley Fool Money, we covered it on Friday, but there was a situation where a bit more than 5,000 employees were fired for flat-out fraud. They were opening fake accounts and whatnot in order to meet short-term incentive goals, it sounded like at the banking center level, and having been in this business -- I did actually work for a big bank in the early 2000's -- the incentive structure begged for this kind of behavior. It was a poor incentive structure, and so I think if we had not seen Wells Fargo's CEO come up and acknowledge the problem and talk about ways that they're trying to remedy it, I might be a little bit more prone to say, "You might want to at least be a little bit concerned," but in the long run, this is just a blip on the radar. Two things stand out here: Number one, Wells Fargo is by far and away the mortgage leader in the United States, and this is an economy that is very much based on housing, and so they make lot of money through their mortgage banking.
That then leads them to a pretty good banking division as well, and we saw them go ahead and acknowledge that it's a flawed incentive system, and they're going to fix it. Now, bottom line is how do they fix it and will it be such that it doesn't get for this kind of behavior in the future? I'd like to see some more information on that, but for now, I would not freak out and just unload Wells Fargo, unless you just feel personally offended and what they did, and that's OK too. A lot of people are pretty pissed about this, and I get that. We've said that a lot of people be very angry about it in the first couple of days and they talk about wanting to switch their bank accounts, and then you start realizing you've got so many automatic withdrawals and things tied to your checking account. It becomes very cumbersome just to change banks anymore. You're going to do what you're going to do, but from an investor's perspective, I don't think I would freak out yet. They'll get past this, and that CEO John Stumpf -- I think is his name -- he's being proactive enough to make me want to learn more.
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