Consumer Law & Policy Blog

What Wells Fargo's Survival After Defrauding Millions Tells Us About the Free Market: It Isn't Enough to Stop Misconduct

by Jeff Sovern

As well-covered on this blog and elsewhere, Wells Fargo employees opened millions of sham accounts for customers, for which they have paid fines and suffered reputational damage. During the House Financial Services Committee September hearing on the Wells fiasco, some Republican committee members berated Wells Fargo's then-CEO, John Stumpf, for giving ammunition to supporters of regulation.  In contrast, the committee's chair, Jeb Hensarling, said that while he didn't believe in companies, he did believe in free markets.  So how has the market treated the bank? Well, here's what Brian Tayan posted in December at the Harvard Law School Forum on Corporate Governance and Financial Regulation:

The long-term impact on the bank was unclear. Customer visits to branches declined 10 percent year-over-year in the month following the scandal. Credit card and debit card applications also fell. Deposits and new checking accounts, however, continued to grow—albeit at below-historical rates.

And here are some excerpts from a January 13, 2017 news release reporting on Wells's income for 2016:

Net income of $5.3 billion, compared with $5.6 billion in fourth quarter 2015.

* * *

Total average deposits for fourth quarter 2016 were $1.3 trillion, up 2 percent from the prior quarter, driven by both commercial and consumer growth.

In other words, the free market is not doing much to punish Wells. While it is impossible to know if Wells would have done even better in the absence of the scandal, Wells does not seem like a company on the brink of failure.  True, the free market may yet catch up with Wells, but it seems far more likely that consumers inclined to move to other banks would have done so last summer or fall, when the scandal was the subject of frequent news coverage, than now, when Wells has largely fallen out of the news cycle. And just to be clear, this is not a situation of the government propping up a too-big-to-fail bank.  Far from helping Wells, the government fined Wells and gave its bad conduct publicity. It's not the government opening up those new accounts; it's consumers.

So regulators have actually done quite a bit to discipline Wells for its misconduct while the free market has dropped the ball.  Why then, would Jeb Hensarling and his colleagues want to limit the power of regulators and leave discipline to the free market?  In his terrific new book, Economism (about which I expect to post more another time), Connecticut law professor James Kwak suggests that economism is a religion-like ideology that adherents use to justify opposition to regulation.  Chairman Hensarling believes in free markets even when the evidence is that the free market failed. 

Just to be clear, I have no desire to see Wells shut down or suffer significant reverses. I just want it appropriately disciplined for defrauding consumers, forced to compensate injured consumers, and deterred from similar conduct in the future.  Until regulators got involved, none of that seemed to be happening.  The free market dropped the ball on this one. In fact, as far as I know, the free market did nothing at all until Wells's misconduct was publicized by regulators.

Why haven't consumers abandoned Wells? I've heard it suggested that consumers don't like to switch bank accounts because they incur transaction costs in also switching direct deposits, automatic withdrawals, etc. (I'm not sure of my source for that and so can't attribute it; if you know of a source, please let me know in a comment). That may account for part of it, but it wouldn't explain why accounts are growing.  But for purposes of this discussion, it's not necessary to explain why consumers haven't punished Well; it's enough to note that they haven't.  In other words, despite perhaps the biggest retail banking fraud since the Great Recession, we can't depend on the free market to discipline financial institution misconduct.  Yet another demonstration of why we need strong, independent regulators--exactly what the Republican Congressmen who placed ideology ahead of helping consumers feared.

 

CBS News: Senate Republicans aim to gut debit-card safeguards

Here. This is about the resolution we reported about on Thursday to block the CFPB's prepaid debit cards rule from going into effect.  The resolution has now drawn the support of seven senators. Excerpt:

A spokesman for Sen. Mike Lee said that the “CFPB’s prepaid card rule is overly broad” and would increase compliance costs. Those costs “would be borne by the consumers who use this fast-growing product, but it would also stifle innovation in the payments industry,” the spokesman said.

Consumer advocates decried the resolution as a thinly-veiled giveaway to Netspend, a controversial issuer of prepaid cards. Netspend is one of the main opponents of the CFBP’s proposed prepaid card disclosure requirements and would potentially lose up to $80 million annually in overdraft fees imposed on the largely low-income buyers of its prepaid cards, according to the National Consumer Law Center (NCLC).

“It is outrageous that Congress may block basic fraud protections on prepaid cards so that Netspend can keep gouging struggling families with overdraft fees that have no place on prepaid cards,” said Lauren Saunders, associate director of the National Consumer Law Center (NCLC).

WSJ: "Trump administration said it would seek broad changes at the Consumer Financial Protection Bureau by altering its 'personnel'"

Another claim without a source, but the story is here (behind a paywall).

Ben-Shahar & Strahilevitz Propose that Contracts be Interpreted Based on Surveys

Omri Ben-Shahar and Lior Strahilevitz, both of Chicago, have written Interpreting Contracts via Surveys and Experiments.  Here's the abstract:

Interpreting the language of contracts is the most common and least satisfactory task courts perform in contract disputes. This article proposes to take much of this task out of the hands of lawyers and judges, entrusting it instead to the public. The article develops and tests a novel regime — the “survey interpretation method” — in which interpretation disputes are resolved though large surveys of representative respondents, by choosing the meaning that a majority supports. The article demonstrates the rich potential under this method to examine variations of the contractual language that could have made an intended meaning clearer. A similar survey regime has been applied successfully in trademark and unfair competition law to interpret precontractual messages, and the article shows how it could be extended to interpret contractual texts. To demonstrate the technique, the article applies the survey interpretation method to five real cases in which courts struggled to interpret contracts. It then provides normative, pragmatic, and doctrinal supports for the proposed regime.

Maybe we should take a survey to see how people feel about the idea.

Miles Kimball: The Philosophical Basis for Consumer Financial Protection as Part of Limited Government

Here. This has been up since December, but I only just saw it. It offers a perspective from an economist.  An excerpt:

I can see three principles that can justify consumer financial protection beyond simple contract enforcement: 

Duping people is fraud even if they wouldn’t have been duped had they had infinite time and infinite intelligence. * * *

Facilitating gain for oneself and harm to others by taking advantage of preexisting confusion is predation of those who are especially vulnerable. * * *

It is legitimate to protect time-slices of people from serious injury by other time-slices of people. * * *

Other than the possible issue of almost unfireable regional Fed Presidents who have not been confirmed by the Senate voting on monetary policy, the Fed has passed US constitutional muster. So it seems possible that the CFPB could be governed in a similar way without being unconstitutional. The [PHH case] suggests that if only the Chair of the Fed could vote, the Fed would be unconstitutional too. If that is, so, there could be more people appointed to govern the CFPB, just like the Fed. But in practice, the way the Fed is governed seems quite different in practice from the usual bipartisan board for government agencies.

WH's Spicer Calls CFPB Unconstitutional

Here. 

CBS News: Samsung Trying to Block Class Actions for Exploding Phones by Invoking Arbitration Clause No One Noticed

Here. HT: Gregory Gauthier

Trump orders review of Dodd-Frank regulations

Read about it in this article by Jim Puzzanghera and Michael Memoli. An excerpt:

At a White House meeting with top corporate chief executives, including Jamie Dimon of J.P. Morgan& Co., Trump said Friday that major reductions in financial regulations were coming. *** After the CEO meeting, Trump signed an executive order directing the Treasury secretary to consult with regulators about what needs to be done to fix the Dodd-Frank Wall Street Reform and Consumer Protection Act and to report back. [According to an unnamed "senior administration official,"] [t]hat report is expected to come within “a relatively short period of time.”

Eighth Circuit limits appeal bonds in class action settlement appeals

In In re Target Corp Customer Data Security Breach Litigation, No. 15-3909 (Feb. 1, 2017), the Eighth Circuit reversed a district court's approval of a class-action settlement because of its unreasoned class certification, which the court of appeals said "was the product of summary conclusion rather than rigor."

More importantly to my mind, the Eighth Circuit also reversed the district court's order requiring the settlement objectors to post a bond of nearly $50,000 to cover the costs of the appeal. The court rejected the argument that the amount of the bond may include "costs associated with delays in administering a class action settlement." Slip. op. 8. Instead, following the lead of other circuits, the court said that the amount of an appeal bond must be limited to "direct appeal costs" -- the specific costs that the winning party may be reimbursed by rule or statute. Id. at 8-10. These costs, such as for the costs of reproducing the appellate briefs, are likely to be fairly modest in most cases. See Federal Rule of Appellate Procedure 39.  

DC Circuit denies motions to intervene in PHH v CFPB

Last week, 17 state attorneys general, two congresspeople, and several consumer-advocacy organizations moved to intervene in PHH v. CFPB, pending in the DC Circuit. The motions each sought to intervene to support (and if the agency stopped defending the case to pursue) the CFPB's petition for rehearing of the court's decision last fall, in which it held struck down as unconstitutional a provision of the Dodd-Frank Act under which the CFPB director could be fired by the President only for cause, as opposed to for any reason or no reason at all. We discussed and linked to the court's opinion here and the rehearing petition here.

Yesterday, in a 1-page order, the DC Circuit denied the three motions. The petition for rehearing is still pending.