Wells Fargo CEO Stumpf: Public Enemy No. 1 With Assist from Dodd-Frank

Once banking royalty, Wells Fargo (NYSE:WFC) CEO John Stumpf, is now the latest public enemy No. 1 of the business world and with good reason: In the midst of a high-pressure sales culture under his watch, employees allegedly ripped off customers by creating millions of sham credit card and banking accounts with little or no oversight.

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But Stumpf shouldn’t be the only one pilloried in the press or by the Senate Banking Committee, as he was on Tuesday for his “gutless leadership,” as his toughest inquisitor Senator Elizabeth Warren (D-MA) put it. The blame should be extended to the clueless political leadership that gave the country the cockamamie post-2008 banking crash financial regulations that are likely part of the root cause of the Well Fargo mess and the alleged crimes that appear to have occurred.

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Again, this is not to exonerate Stumpf or his management team who appear just as clueless when they failed to stop such an allegedly vile scandal from taking place: Namely how lower-level employees, pressed to meet sales quotas and ramp up fees, created sham banking and credit-card accounts all under the nose of their supervisors, and seemingly under the nose of Stumpf himself.

Warren, who never met a banker she liked, had a field day with Stumpf during Tuesday’s hearings. She pointed out how the Wells Fargo CEO bragged to investors and analysts about how he and his team were cranking out fees by “cross selling” various banking products to customers. Adding insult to injury, she pointed out that his own massive paycheck [which Warren cited, including stock, neared $200 million] grew at least in part because of these suspect sales practices, and that he didn’t plan to fire anyone over the scandal. Not even Carrie Tolstedt, who oversaw consumer banking and retired in July with a $125 million package, identified what was going on.

That’s all before Warren called for Stumpf’s resignation, which by the end of the day, seemed like a forgone conclusion and shares of Wells Fargo rose 1.2% to $46.56 per share on Tuesday.

It’s pretty clear, say legal experts, at least from these hearings, that Stumpf – who at times appeared flummoxed answering even the most basic corporate governance questions – has screwed up, and if he doesn’t resign, speculation is he and the bank will still face numerous civil and criminal inquiries for years to come.

But if the good senator could have restrained herself for a moment from making Stumpf look like an ass, she could have asked him why he and his team thought it was such a good idea to target retail bank customers to ramp up credit card and bank accounts with high-pressure sales practices (which in of itself isn’t a crime).

Like it or not banks are still entitled to grow revenues, albeit without violating regulations.

My guess is the reason Warren didn’t ask the question is because she wouldn’t have liked the answer. That’s because it would lead to a much more meaningful conversation about the misguided Dodd-Frank regulatory overhaul passed in the aftermath of the 2008 financial crisis that she, President Obama, his would-be successor Hillary Clinton and every major Democratic lawmaker has supported and wants to build upon.

Named after former liberal banking lawmakers, Senator Chris Dodd (D-CT), and Rep. Barney Frank (D-MA), Dodd-Frank was supposed to make banks less risky, and more accountable to the public since it was risk taking and a lack of oversight that caused the 2008 banking collapse in the first place.

But the remedies imposed by the law went so overboard that banks had to cut back their lending to small businesses, ramped up fees on products they once gave away for free as they were forced to flee profitable businesses that had almost nothing to do with the crisis, such as trading and banks opening their own hedge funds, that the regulators deemed too “risky.”

It also kept the banks big and unwieldy, under the theory that the banks can keep their size as long as a bunch of regulators kept them on their toes.

There were plenty of regulators who missed the warning signs of 2008, primarily because most don’t know the first thing about the banking business, which is essentially what happened here: Wells Fargo, because it was forced out of profitable trading and Wall Street businesses, began to seek fees from its commercial banking business, that was largely untouched by the law because it didn’t fit the regulators idea of what is “risky.” And because regulators then became focused on high credit card fees, bank management made up the difference through volume of sales.

And it worked. Wells Fargo was among the world’s most profitable banks, and Stumpf considered among the best CEO anywhere. That is until now.

Where were all these new regulators armed with new regulations when it appeared Wells Fargo did more than “cross selling” to make its profit targets? Nowhere to be found, it appears. Dodd-Frank, which allowed banks to remain big, created a banking system that is unmanageable both from within the banks and by regulators who had no idea the banks business model began to adapt to their new regulatory environment.

The good news is that if Hillary Clinton loses to Donald Trump in the upcoming presidential election, Dodd-Frank may be ditched. Trump, I am told, isn’t a fan of banking regulation.

Nor does he like the idea that banks should be big and unwieldly, with at least one of his advisers telling me he might favor a return to the old system under the Glass-Steagall law that separated commercial banks from their securities businesses. Thus making it easier to regulate and manage to avoid the next Wells Fargo scandal or financial meltdown.

But before that it’s probably a good bet Wells Fargo isn’t alone among the big banks in using overly aggressive sales practices to push products and ramp up fees. In fact, the Consumer Financial Protection Bureau told FOX Business last week, it has put other banks on notice.

It’s also a good bet that lefties like Warren and Hillary Clinton, if she wins the presidency, will be pushing for more Dodd-Frank-like regulations to protect the public from the next scandal even if such remedies are at the heart of the problem in the first place.