Changing our thinking to feel better. Yes, we do that!
After I earned my MBA at the University of Chicago, I joined the staff of the national trade group representing savings and loan associations. S&Ls were then the U.S.’s biggest source of mortgage loans and were traditionally constrained in the types of loans and accounts they could offer customers. But over the 15 years in which I wrote about the banking business and became editor of the association’s magazine for bank management, the deregulatory wave fostered under Ronald Reagan’s presidency swept away many of the constraints on S&Ls.
As a result, by the late 1980s in what was then the largest banking crisis since the Great Depression, more than 1,000 S&Ls became insolvent because of bad loans. A subset were milked by crooked executives and investors who took over some previously reputable institutions to fund sketchy projects and share in the ill-gotten gains. 1
I was there!
In the lead-up to the crisis, I had encounters with two savings and loan executives who later tangled with the law for their misdeeds.
One, Charles Knapp, Board chair of nation’s largest S&L and our banking association’s biggest dues-paying member, called me from his helicopter to yell at me about a story we had in the works reporting on lawsuits against the S&L. He threatened to resign from the association if we published the story. With the backing of my boss and after we double sourced the facts, we ran the story. He did not quit. But not long after that, Knapp was ousted from the leadership of California’s American Savings, which subsequently failed, and after that he was sentenced to prison for 6 ½ years for duping an Arizona savings and loan into lending him $15 million. 2 3
The second was Board chair of Denver’s Silverado Savings, Mike Wise. In the late 1970’s, Wise was hired from a Kansas S&L to rescue Mile High Savings, which was teetering on failure. A fellow banker described Wise as “…[a] charismatic guy. Mike, a former men’s clothing salesman, wore a suit better than Maurice Chevalier. And he had the poise, panache, and diction to back it up. His mind was quick, and he had a remarkable ability to grasp a bigger picture. But he had at least one glaring flaw. He had a compulsion: It wasn’t alcohol, drugs, or gambling, but rather high living.” 4
Indeed, that was the engaging banker I interviewed when I met Wise in his offices in 1985 to write a story on Silverado’s business strategy. (Under Wise, Mile High Savings was renamed to gain the shine associated with Colorado’s century-earlier gold and silver rush.) Wise made big loans to Colorado’s biggest developers and builders. Silverado grew, and so did Wise’s reputation as one of the country’s sharpest young financial executives. But eventually the sketchy loans he approved to over-stretched developers caught up with him. When the bank ran out of capital, he lent money on a development with the stipulation that the developer return some of the loan funds to buy Silverado stock. But then the real estate bubble burst and Silverado failed. The Denver Post reported, “Silverado’s collapse in 1988 saddled taxpayers with a $1 billion tab and tarnished the state’s reputation because of the attention drawn by high-profile board member Neil Bush, son of then-Vice President George H.W. Bush.“ 5 After he beat a federal fraud rap for his actions at Silverado, Wise later was convicted of running a Ponzi scheme in Aspen and served 3 1/2 years in prison.
It's hardly a stretch to recognize that power and money biased both Knapp and Wise to make very bad decisions that hurt themselves, their employees, customers and the U.S. economy.
An astonishing case
With that background, you will understand why I am astonished about a much more recent and much larger case of banking misconduct, for which I believe no one has yet to serve time in custody. This case amplifies the decision-making errors recounted above.
In February 2020, Wells Fargo, the nation’s fourth largest commercial bank, stunningly admitted that it had assessed customers millions of dollars in fees as employees falsified records, forged signatures and misused customers’ personal information to open fake accounts to meet unrealistic sales goals. The bank said its leaders knew of the misbehavior, including “violations of federal criminal law,” as early as 2002 but did not stop it until 2016. 6
CEO John Stumpf and his management team incentivized bankers to get customers to open more accounts. The goal was eight accounts per customer, compared with an average of three accounts 10 years earlier. Bankers were paid big bonuses for hitting goal.
The CEO used a rhyme in the bank’s 2010 annual report to disclose how he selected 8 accounts per customer as the target: “I’m often asked why we set a cross-sell goal of eight. The answer is, it rhymed with ‘great.’ Perhaps our new cheer should be: ‘Let’s go again, for 10!’” 7
“Gaming” the customer
Wells Fargo admitted that employees were pressured to sell large volumes of new products to existing customers as a way of generating more business, often with little regard for a customer's actual needs. Bank employees began calling the practice "gaming," and it included opening accounts without a customer's knowledge, issuing credit and debit cards, and moving money from existing accounts to the fraudulently opened ones. 8 Employees earned incentive bonuses for meeting or exceeding quotas based on the bogus accounts.
According to the New York Times, employees “opened millions of accounts in customers’ names without their knowledge, signed unwitting account holders up for credit cards and bill payment programs, created fake personal identification numbers, forged signatures and even secretly transferred customers’ money.” 9
The bank imposed unrealistic sales goals on employees, who were “intimidated and badgered” to comply, the Office of the Controller of the Currency’s lawsuit says. In 2010, one employee told senior executives, “The noose around our necks ha[s] tightened: we have been told we must achieve the required solutions goals or [we] will be terminated.” Another employee wrote to the chief executive’s office and another senior leader in 2013, saying, “I was in the 1991 Gulf War… This is sad and hard for me to say, but I had less stress in the 1991 Gulf War than working for Wells Fargo.”
A laundry list of misdeeds
Slate.com enumerated “a selection of the misdeeds for which Wells Fargo has been penalized by various agencies over the past few years:
Overcharging service members for loans, and then…
Illegally repossessing their cars.
Failing to file reports on suspected money laundering activity.
Failing to obey regulations for bankruptcy planning.
Charging auto loan customers for duplicative insurance without their knowledge.
Wage violations.
Keeping conveniently mum to investors about the incipient fake account scandal.
Encouraging retail investor churn in high-fee products.
Deliberately originating mortgage loans with false income information.
Taking punitive action against whistleblowers in its own company.” 10
Between 2011 and 2015, “tens of thousands of employees were the subject of allegations of unethical sales practices” and more than 5,300 were fired, according to a statement of facts agreed to by Wells Fargo in the OCC lawsuit. 11
Yet, "there are not 5,000 bad apples," said Maurice Schweitzer, a professor at the University of Pennsylvania's Wharton School and an expert in ethical decision-making. "It was as if whole-scale divisions of people were put under unrealistic expectations, [and] told to turn in numbers." 12
In all, an estimated 3.5 million accounts were opened without customer knowledge. 13 Millions in unauthorized fees and charges were generated. Stumpf was forced out. Wells Fargo has been subject to fines, government probes and lawsuits. The bank’s reputation has been badly damaged.
Failure of leadership
“This case illustrates a complete failure of leadership at multiple levels” within Wells Fargo, said Nick Hanna, U.S. attorney for the Central District of California. “Simply put, Wells Fargo traded its hard-earned reputation for short-term profits, and harmed untold numbers of customers along the way.” 14
What could have led Wells Fargo’s leadership, starting with former CEO Stumpf, to promote such heinous practices?
Leaders’ attitude seemed to be "If it's good for me it's got to be good for Wells Fargo - screw anyone who thinks differently!" CEO Stumpf was paid handsomely. This appears to be a classic case of self-serving bias, in which we tend to view ambiguous information in the way that most benefits us. A payoff can lead us to think we are right and compromise our values and the group.
While we like to believe that we behave ethically because of our values, research suggests that behavior is often determined by the situation we are in. 15 “More than 90 percent of Americans believe infidelity is unacceptable, yet 30 to 40 percent of people engage in it,” according to Psychology Today. 16 Certainly the combination of incentives, pressure and the potential loss of employment led Wells Fargo bankers to engage in situational cheating.
Research has also shown that dishonest behaviors such as cheating actually alter a person’s sense of right and wrong, so after cheating once, some people stop viewing the behavior as immoral. 17 That finding leads right into the next decision making trap that was likely at work at Wells Fargo.
Alleviating discomfort
Cognitive dissonance is the discomfort we get when we try to hold onto two competing ideas or theories, especially when they involve our past actions and thoughts about ourselves. To resolve the unease, we need to resolve the dissonance between thought and action. Because it is difficult to go back and change the behavior, an effective way for us to practice cognitive dissonance avoidance is to change our thoughts to match our actions. In the case of Stumpf’s subordinates who wound up propagating the Well Fargo new accounts scheme, whatever initial discomfort they may have had about participating was likely allayed by revising their thinking from “this is taking advantage of customers and I do not take advantage of customers” to “this is the way we do it at Wells Fargo and I am a person who follows the party line.”
Interestingly, the original research study about cognitive dissonance avoidance involved monetary rewards for acting in a way that was inconsistent with previous behavior. The study found that when the rewards were small ($1), participants changed their thoughts in response to their inconsistent behavior. But when the reward was larger ($20), participants apparently did not feel the need to change their thoughts because the reward itself justified acting inconsistently. 18
Managers and employees who benefited from the bogus new account bonus system likely were entrapped by the Stockholm syndrome, the psychological response wherein a captive begins to identify closely with his or her captors, their agenda and demands.
Previously we have written about two other factors that surely were at work in the Wells Fargo case. The first is authority, which can lead people to commit acts that conflict with their principles. Managers and employees obeyed those with authority – making the scheme work in likely the only way possible, by gaming the system and victimizing customers. The second is power, which breeds overconfidence in one’s ability to make good decisions. Power blinded Stumpf and his team to the negative consequences when they pushed employees to chase impossible sales goals and ignored feedback. Stumpf was so clueless that he publicly scapegoated employees before Congress.
Endnotes
1 https://www.thebalance.com/savings-and-loans-crisis-causes-cost-3306035#
2 https://en.wikipedia.org/wiki/American_Savings_and_Loan
3 https://www.latimes.com/archives/la-xpm-1993-12-15-fi-2124-story.html
4 https://www.postindependent.com/news/a-man-who-worked-with-money-and-liked-it-just-a-little-too-much/
5 https://www.denverpost.com/2009/04/14/silverado-exec-ends-life-in-florida/
6 https://www.washingtonpost.com/business/2020/02/21/wells-fargo-fake-accounts-settlement/
7 https://thedecisionlab.com/insights/finance/how-wells-fargo-nudged-their-employees-to-commit-fraud/
8 https://www.nbcnews.com/news/all/wells-fargo-pay-3-billion-over-fake-account-scandal-n1140541
9 https://www.nytimes.com/2020/02/21/business/wells-fargo-settlement.html
10 https://slate.com/news-and-politics/2020/03/wells-fargo-fines-penalties-never-stop.html
11 https://www.sec.gov/litigation/admin/2020/34-88257.pdf
12 https://www.washingtonpost.com/news/on-leadership/wp/2016/09/16/wells-fargos-terrible-horrible-no-good-very-bad-week/
13 https://finance.yahoo.com/news/wells-fargo-scandals-the-complete-timeline-141213414.html
14 https://www.cfo.com/legal/2020/02/wells-fargo-fined-3b-over-fake-accounts-scandal/
15 https://thedecisionlab.com/insights/finance/how-wells-fargo-nudged-their-employees-to-commit-fraud/
16 https://www.psychologytoday.com/us/blog/more-chemistry/201403/why-people-cheat
17 https://thesituationist.wordpress.com/2013/06/29/the-situation-cheating-students/
18 http://socialpsychonline.com/2017/02/cognitive-dissonance-festinger-carlsmith/
