Bankers used to be trustworthy, but threw their reputation out the window

Last week, Bank of America was the latest bank to be penalized for fraudulent or aggressive marketing practices. They have had so many fines for malfeasance or aggressive marketing practices that it is hard to keep track of their sins. The latest penalty fined Bank of America $783 million for selling credit card consumers products and services they did not request. The Consumer Financial Protection Bureau (CFPB), which was newly created a couple of years ago by the Dodd-Frank Act under the tutelage of now Senator Elizabeth Warren, said the $738 million of that fine is used to restore money to those customers who were fraudulently sold these products.

In its first two fiscal years of operations ending June 30, 2013, the CFPB has fined banks and financial entities $942 million of which the significant majority goes to the consumers who were harmed or defrauded. The banks and financial institutions that were penalized include, but are not limited to American Express, Capital One, Discover, and JP Morgan Chase. While the significant majority of the penalty goes to the consumers, the remainder, which is usually less than 10% of the overall fine, goes into a Civil Penalty Fund, which has the following purpose as stated in the CFPB 2013 Annual Report:

“Under the Act, funds in the Civil Penalty Fund may be used for payments to the victims of activities for which civil penalties have been imposed under the Federal consumer financial laws. To the extent that such victims cannot be located or such payments are otherwise not practicable, the Bureau may use funds in the Civil Penalty Fund for the purpose of consumer education and financial literacy programs.”

What is interesting to me is why certain politicians are against this agency? I want them to tell me why an agency designed to protect the average Joe’s and Josephine’s is a bad thing. To state the obvious, these politicians tend to be Republican and tend to be supported by bankers. Senator Richard Shelby, who Chaired the Senate Banking, Housing and Urban Affairs Committee from 2003 – 07 is one of the key critics of the CFPB.

This is one area where people who don’t want regulation need to explain how we would be better without it. Would it be OK for bankers to have full license to sell their customers services they do not need? Is it OK for banks to screw people over? I find most people confuse unwieldy bureaucracy with regulation. We need the latter, but need to guard against the former. I also find people who don’t want to be regulated tend to be those who need to be regulated more. The fossil fuel industry comes to mind, but that would be a large digression.

Having worked in Human Resources within a bank back in the 1990s, what I have witnessed is being a banker used to be one of the most trusted professions. Now, it ranks much lower in trust.  And, they only have themselves to blame. Truth be told, bankers used to be trustworthy, but threw their reputation out the window.

The slippery slope began in earnest with the repeal of the Glass-Steagall Act in the late 1990s. This act had been put in place at the time of the Great Depression and was designed to assure that banks would be banks and not investment banks, security traders or insurance companies. With the feeling everyone learned their lesson and cooler heads would prevail, the repeal of the Glass-Steagall Act reopened the can of worms. The real reason for the repeal was banks wanted the fee income that usually came with those products and services. Yet, to add another metaphor, the can of worms became a Pandora’s Box.

What transpired after that repeal is banks pushing the envelope more and cross selling products and services to unsuspecting customers. Two marketing trends emerged. “Bundling” and “Tying.” Bundling represents the concept if you do more business with us, we will give you better terms. By itself, that is not necessarily a bad practice. Yet, when married with tying, it becomes unethical and illegal. Banks started tying business marketing together, so that you had to business with them in one area to get a better deal on another service which was more vital to the buyer. Usually these offers were not made in writing, as some tying can be illegal.

But, the larger trend that occurred is a selling push to reward employees for selling you services you may or may not need. The unscrupulous ones would push the hardest and do things that now get the attention of the CFPB. One of the key reasons the mortgage crisis hit is the better mortgage market dried up and banks had all of these mortgage bankers with nothing to do.

With the push out of the second Bush White House that home ownership was good, the higher risk mortgage market became the target. It was at this time you saw mortgage-in-a-box retail stores competing against banks to sell mortgages to people who did not understand fully what was being sold to them. Variable mortgages and the dreaded Pic-a-payment mortgages that brought Wachovia down after their acquisition of Golden West, were being sold to people who were in over the heads, both economically and educationally. People should have been asking more questions, but trusted the men and women in nice suits that told them they could afford the American Dream. They failed to mention or fully explain terms like “negative amortization” and “variable mortgages” especially what transpires when the rate goes up by 200 basis points.

So, bankers used to be trustworthy, but they threw it out the window. They earned these new stripes. You have to be the navigator of your customer service experience, in general, but especially with a bank. You have to ask questions about why you are being asked to do something. You need to ask why you need another credit card. You need to ask why is the salesperson pushing so hard on this issue. If you don’t, you may need the help of the Consumer Financial Protection Bureau.

With that said, I know many fine people who work for banks. They do their best to serve their customers. Yet, the higher-ups are pushing for sales and align incentives with that push. As a result, even well-meaning people will push the envelope even more. I have been a business for over 34 years and a truism I have learned is you make more money serving the needs of your client long term. You may make more money on occasion by pushing that envelope, but you may do so at the expense of a long term relationship which might come to an end.

For full disclosure, I am a shareholder and customer of both Bank of America and Wells Fargo. These fines disappoint me. I want them to be accountable to their customers, employees and shareholders. But, they also need to be accountable to their regulators. They owe it to all of us.

 

 

 

Lesson to Leaders – We need you not to cheat

Paraphrasing a quote from Friedrich Nietzsche, the German philosopher: It matters less that you lied to me, as it matters more that I can no longer trust you. In any relationship, this quote describes the unfortunate epiphany when one realizes that another party has lied to them. Trust is built over time, day by day, brick by brick. Yet, a lie can bring the whole building down and cause you to re-earn that trust. Today, I want to focus on leadership letting us down by not shooting straight with us. Oftentimes, when a leader lies or cheats, it is to protect his job or gain a huge return.

Many of the companies who failed us under the financial crisis – Bear Stearns, Lehman Brothers, Wachovia, Merrill Lynch, Washington Mutual, AIG and so on, either no longer exist, were bought by someone else or received a huge bailout to make it through. Some of the bigger ones who survived, such as Bank of America, JP Morgan Chase and Citigroup, are still dealing with issues they perpetuated or acquired from one of the above companies. At the heart of these problems were companies trying to make huge amounts of money off selling mortgage loans to people who could not afford them, packaging the bad loans in bundles and selling them off as reasonable assets. One of the fallacies of spreading risk by bundling is if all of the risk is crap, it won’t be better when bundled.

Yet, the leaders of these companies failed to be good stewards to the customers, fellow employees and managers, shareholders and regulators. If you read “Crash of the Titans” about Merrill Lynch and Bank of America, you will realize that only a handful of people in Merrill knew what was going on, but the CEO lied to his other direct reports and lied to his shareholders when questioned. As a result, the shareholders and public were misled. If you follow-up on Lehman Brothers, who went under, you will see that the CFO moved $50 million to the onshore books from the offshore books for the regulators’ eyes and then moved it back again. This was reported by “60 Minutes.” Yet, to this day, no one from Lehman has gone to jail.

In each of these cases, you will find cheating and lying at the heart of the story. As I have said in earlier posts, the banking industry used to be one of the more trusted professions, but these liars and cheaters (let’s call them what they are), breached this trust. Some conservative leaders balk at the requirements of Dodd-Frank regulations which introduced accountability and the creation of the Consumer Finance Protection Agency initially run by now Senator Elizabeth Warren. This agency has already fined financial companies over $600 million (as of last summer) and counting for malfeasance and misrepresentation. So, the answer to those who balk is “tough, these foxes brought it on themselves and we have to guard the henhouse.”

Unfortunately, this plays out in spades in political circles. We have legislators who are so beholden to their funders, they are less inclined to tell you what they think, as they must go along with what the funders think. Please refer to my previous post on “The Routine Bigger Conspiracies” for how this misrepresentation can manifest itself on some bigger issues. It goes even further when we look at the job preservation motivation. Legislators worry more about keeping their job than doing their job. This is the very reason nothing has happened on gun control laws. They are failing to do the right thing because of a huge funding source in the NRA.

Recognizing that the GOP congressional leaders seem too zealous on the Benghazi episode, when you set aside the unhealthy motivation of “gotcha politics,” there are legitimate questions that need to be asked and answered. If the President had been less concerned with spin-doctoring from the outset, some of these questions would not exist. The real answer would seem to be “we failed to read the risks correctly and we did not have protection in place and people died.” The same goes for Senator Mitch McConnell who had a report buried in October (as reported by the New York Times) that showed trickle down economics failed to work. As this was key talking point of the GOP Presidential candidate, it seemed to be politically motivated.

I have also noted on several occasions over my disdain over the previous administration’s fabrication of a story of Weapons of Mass Destruction based on faulty data. People would say they did not know, but that is not true as Scooter Libby, who worked for Karl Rove, went to jail for something Rove later said he knew about as well. As you recall, Libby leaked the name of Valerie Plame to the press, who was a CIA operative and whose husband (and former ambassador) reported at the behest of the CIA that there were no nuclear building materials being sent to Iraq by Libya. This report was misused by Bush/ Cheney and when the ambassador complained in the press, Libby leaked Plame’s name to discredit him. In essence, this is one of the smoking guns that showed Bush/ Cheney lied to the American people and many Americans have paid the ultimate price for this deception.

And, it also flows to state and local politics. To give some brief examples, in NC the Speaker of the House knew he did not have enough votes on a bill, so he sent everyone home at midnight only to call everyone back in from a 1 am vote. He knew others would leave, so he alerted his crowd to pass the word to stay and the yea votes now outnumbered the no votes. On a bill to move the potential to frack for natural gas, one of the legislators voted yes incorrectly and rushed forward to say she needed to change her vote. It was not allowed and the bill passed by one vote. Last week, a NC Committee Chair knew he did not have enough votes, so he took a voice vote – all in favor say “aye” all opposed say “no.” He purposefully heard the loudness differently than others, bragged beforehand he would find a way, and said it passed.

We citizens, customers and shareholders need you to do business in the right way. When you cheat, we seem to be the ones who get screwed. As I told one the Committee Chair, I do not care if you disagree with me, but I do care if you cheat. I said I did not know your name last week, but now I do. Please help us hold people accountable. When you hear that someone does not want regulation, I can assure you it the voice is echoing what is told to them by those who are regulated. We need less bureaucracy, but make no mistake, the foxes need regulation. Someone has to hold people accountable, because it is obvious that market and legislative practices will not.