It was revealed last week that Wells Fargo, the second-largest bank in the country, has been caught in a craven money grab at the expense of its smallest retail customers in a scandal that recalls abuses of the 2008 financial crisis in terms of sheer audacity. Taking a page from the telecom companies that used to “slam” customers by changing their long-distance providers without notice or request, Wells Fargo’s salespeople opened millions of credit card and other accounts for individuals who did not ask for them, producing fees for the bank and inflicting credit damage on consumers.
It’s plain why this happened. The cause was a familiar two-step among the management of the massive corporations that dominate global banking and many other industries. Step one: Set aggressive sales and earnings targets, using employee compensation as the incentive to get there. Step two: Fail to monitor the salespeople (or traders, or engineers, or whomever might be on the front lines several levels down) who inevitably respond to the enormous financial and career pressures—and lax supervision—by crossing ethical and legal lines.
What’s less plain is the regulatory and legal cure to this repeating problem in the world of large American corporations. Contrary to understandable popular urges, criminal prosecution cannot free us from the grip of these recurring maladies.
What is the result whenever these sorts of abuses are uncovered? Big headlines, big uproar, and a large, usually “unprecedented” fine. Lather, rinse, repeat. This has been the story of the corporate scandal in America and its legal system for at least two decades. Wells Fargo was unusually cautious in the years leading up to 2008, hovering around the perimeter of the risk-laden mortgage-backed securities market and refusing to deal in the most toxic of mortgage products. But even this bank turns out to have no immunity from the cycle of profit pressures, line-crossing, scandalous revelations, and angry recriminations from the public and politicians.
Many people think this sort of thing keeps on happening because we haven’t prosecuted enough people or sentenced those who have been convicted to enough prison time. This belief is erroneous. In the early 2000s, dozens of executives of major corporations, including Enron and WorldCom, were imprisoned, some for more than 20 years. (I was a prosecutor in the Enron cases.)
Those prosecutions apparently did nothing to deter the risk-taking orgy of the banks and their investment markets during the mortgage-backed securities craze, even though the institutions that crashed our financial system employed practices that were simply less illegal versions of what the rogue companies of 2001 and 2002 had done. The “less illegal” part explains why criminal cases against bank executives proved so difficult to mount after 2008: The Enron-era prosecutions, as much as a deterrent, might have highlighted the sort of behavior that lands an executive in prison and given the next generation of corporate managers a clearer idea of how to skirt, and exploit, the lines of the law.
Contrary to popular belief, while probation and community service were once the norm for white-collar crimes, the data—as opposed to the most press-worthy anecdotes—show that sentences of five, 10, and even 15 years in prison—without parole—are now commonplace. Even judges with no sympathy for business criminals have blanched at harsh sentences sometimes called for under the United States sentencing guidelines, a ratchet that Congress has turned up after each major financial scandal to a point where big fraud cases can now earn the equivalent of aggravated murder: life in federal prison with no possibility of parole.
The real reason that criminal law has not delivered us from our corporate troubles is that it does not have the capacity to do so. The true barrier is the definition of white-collar crimes themselves, not the people whose job it is to prosecute them. Furthermore, there is no plausible fix to those laws that would transform them into a magic tool for corporate control.
Perhaps the salespeople who crammed those products onto Wells Fargo’s customers could be prosecuted for fraud or the like. But the bank has fired more than 5,000 people for this conduct! Does anyone believe that Wells Fargo just happened to have a really bad recruiting operation that selected only proto-criminals to be hired at the bank?
As is almost always true with the big corporate scandals, the problem at Wells Fargo was not bad apples but a diseased orchard. Too often, as in this case, the owners and managers of the orchard can’t be prosecuted because, while creating an environment of high rewards and low or no penalties, they didn’t break laws themselves or, in all likelihood, even know laws were being broken.
It is tempting to think we should make a crime of this kind of bad management. But it is questionable whether such a law could pass constitutional muster. Consider the vagueness, especially in the context of the largest corporations, of things like managing too aggressively, incentivizing employees too strongly, or monitoring legal compliance too loosely. Constitutional questions aside, we ought to hesitate to condemn with the harshest of sanctions the very risk-taking behaviors corporations and capitalism are by definition designed to promote in the first place.
The problem is the large corporation, not the people inside it—who turn over and over across scandal after scandal. It is time to put aside fixation with prosecutions as the cure-all for America’s corporate ills. The brilliant American innovation of the large, modern public company has had a major role in bringing our nation historically unprecedented wealth. But these corporations are plainly out of the control of those tasked with managing and regulating them. The corporate institution itself—its scale and the rules for how it operates—is what needs a hard and deep new look.
The immediate imperative is not a splashy police roundup but a fundamental rethinking of the scale of large American businesses and the day-to-day legal responsibilities of corporate managers. This should be a sustained conversation that leads to serious reforms such as those championed by Theodore Roosevelt in the 1900s and Franklin Roosevelt 1930s, following our first troubled encounters with the American corporate behemoth. Those reforms were powerful and effective, but these very different times call for new ideas. Getting that conversation started is the only way to get past the repeating cycle of the American corporate scandal.