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The Wells Fargo scandal proves that banks are way too big

So Wells Fargo is clawing back millions of dollars in compensation from high-level executives in light of the bank’s phony accounts scandal.

I’m all for it. But I think we’re kind of missing the point here.

The problems at Wells Fargo aren’t about John Stumpf, the bank’s longtime CEO. Nor are they just about the 5,300 employees the bank fired in relation to the scandal. No, the point is that big U.S. banks are just too big.


Wells Fargo is just one of many immense financial organizations in the country. It’s the largest mortgage lender in the U.S. and the second-largest auto lender. It’s the largest bank by market capitalization. (That’s basically the stock market’s estimate of what the company is worth. If you measure by assets, Wells is the second-largest U.S. financial institution, behind JPMorgan Chase.)

Size matters. Why? Math. If a company’s stock price is to rise, the company needs to generate profit and revenue growth. And the bigger a company is — any company, not just banks — the harder that becomes.

For example, if your company made $1 million in profit last year, and $2 million this year, profits rose 100 percent. But if you made $100 million in profit last year, and $101 million this year, profits rose just 1 percent, which is pretty weak by Wall Street standards (even though profits rose by the same dollar amount in both instances). Executives are heavily incentivized to generate significant year-on-year percentage growth. And that pressure filters down through the organization, to regular employees, whose jobs depend on whether they make their growth numbers.

That seems to be the story behind Wells Fargo firing more than 5,000 (you read that right) employees over the past few years for improper practices in which they opened and closed bank and credit card accounts without customers’ knowledge, sometimes charging fees for doing it. The bank announced it would pay $185 million in fines to regulators related to the practices, and it says it has refunded about $2.6 million in fees to customers thus far.


And now, after CEO Stumpf received a thorough and bipartisan thwacking as part of testimony before the Senate Banking Committee last week, the company, which at first sought to shift the blame for the mess to relatively low-level employees, has rightly agreed to claw back some executive compensation, from Stumpf and the head of Wells’ consumer banking division. That’s good. But we should remember that this goes way beyond some bad decisions at one bank.

Remember a couple years back, when JPMorgan, another U.S. financial behemoth, had to admit that a relatively obscure office in London had undertaken a series of risky, hard-to-get-out-of trades that generated more than $6 billion in losses for the bank?

Before the situation came to light, that office had generated outsized profits for the bank. The Wall Street Journal reported in 2012 that the London office in question had generated $4 billion in profit in the three years before the scandal, or 10 percent of the bank’s overall profit during that time.

Like Wells Fargo, JPMorgan eventually had to pay (roughly $1 billion) to settle inquiries related to the trading blowup. JPMorgan also cut pay for its CEO, Jamie Dimon, in 2012, after the bank had to pony up a record $13 billion more in penalties to settle legal issues tied to problematic mortgage-backed securities before the financial crisis.

But we can’t look at these events as one-offs. Economists have long known that an outsize financial sector can be a bad thing for the real economy. The reason, in part, is that finance is supposed to support the real economy, not supplant it.


If there’s too much finance, the risk is that banks will all compete for relatively small amounts of legitimate business, resulting in declining lending standards — and, perhaps, ethical standards — and eventually, if it goes on long enough, a banking crisis.

You can see the Wells Fargo scandal as part of the same story. It’s a big bank, trying to move big numbers, and employees saw the only way to do that was by lowering standards.

Dennis Russell, a former call-center staffer for Wells Fargo, told the New York Times earlier this month that he was expected to refer more than 20 percent of the people calling Wells Fargo’s customer service line to sales representatives.

“The people calling didn’t have assets to speak of,” Russell said. “What products could you possibly offer them in a legitimate way?”

So, what’s the answer? Time. The financial sector is now shrinking, thanks to tighter regulation, falling fees on financial products, and levels of U.S. debt that flatlined after the financial crisis.

But it will take a long time to right-size the U.S. financial sector in relation to the real economy.