The Banks Special

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Speaker A: This ad free podcast is part of your Slate Plus membership.

Speaker A: Hi, this is Felix and I am very excited about this week’s show.

Speaker A: It’s all about banking, which is the top story in the news this week.

Speaker A: We have Kevin wack on.

Speaker A: He is amazing.

Speaker A: We are going to talk about Silicon Valley Bank, but just so you understand, we are not going to talk about the bank run on Silicon Valley Bank because that happened after we recorded the show.


Speaker A: The structure of why there was a run and why Silicon Valley Bank was in trouble.

Speaker A: We do cover in the show and a lot of other stuff.

Speaker A: Stay tuned.

Speaker A: Hello, welcome to the bank special episode of Slate Money, your guide to the business and finance news of the week.

Speaker A: I’m Felix Salman of Axios.

Speaker A: I’m here with Emily Peck of Axios.

Speaker B: Hello.

Speaker B: Hello.

Speaker A: I’m here with Elizabeth Spires.

Speaker A: Hello.

Speaker A: And we are going to talk all about banks and banking this week.

Speaker A: It is a fascinating subject we don’t spend enough time on.


Speaker A: One of the reasons we don’t spend enough time on it is that we don’t have a huge amount of expertise on it.

Speaker A: But this week we have a special guest who does, mr.

Speaker A: Kevin Wack.


Speaker A: Welcome.

Speaker C: Thanks for having me, Felix.

Speaker A: Kevin, introduce yourself.

Speaker A: Who are you?

Speaker C: Well, I’m the national editor at American Banker, which is an industry publication that covers the US banking industry.

Speaker A: You are going to talk all about banking to US retail banking, the misadventures of Goldman Sachs.

Speaker A: We have a Slate Plus segment on the asset side of bank’s balance sheets and what happens in a rising interest rate environment, all manner of sexy stuff.


Speaker A: And especially we are going to talk about your incredible five part series about Wells Fargo and all of the insane stuff that went sideways in Wells Fargo with the fake account scandal.

Speaker A: It’s a great episode.

Speaker A: Stay tuned.

Speaker A: It’s all coming up on Slate Money.

Speaker A: So Kevin, welcome.

Speaker C: Thanks for having me, felix, it’s great to have you.

Speaker A: And we are just going to devote this entire segment to banks, which for a Money podcast, I feel like we don’t really talk about good old fashioned retail banking.

Speaker A: Everyone who listens to this podcast, I’m going to just come out and say with maybe like five exceptions, has a bank account.


Speaker A: They’re probably a bit annoyed at their bank account.

Speaker A: Very few people love their bank and it’s just a fact of life that people don’t talk about probably as much as they should on Money podcasts.

Speaker A: We are going to rectify that right here.

Speaker A: And I think the first big question I want to ask you is as an industry, how is it, how is the retail banking industry doing right now?


Speaker C: It’s doing okay.

Speaker C: It’s doing fine.

Speaker C: Banking is usually doing pretty well, right.

Speaker C: And this isn’t really a huge exception.

Speaker C: I think coming out of the pandemic there are sort of rising concerns about credit, but no one seems to be in panic mode.


Speaker C: And then, I guess, one sort of unique thing, or interesting thing from my perspective.

Speaker C: I’ve been covering banking for about twelve years, and for that entire time, really, deposits have been sort of seen as irrelevant or not really an important story in banking.

Speaker C: And I think that’s finally starting to change right now with interest rates rising.

Speaker A: Yeah, that’s something I really am fascinated by, which is this idea that for the past twelve years we basically were in this world of zero interest rates.

Speaker A: And so banks kind of didn’t like deposits because they’re checking accounts and deposits, they’re quite expensive to maintain and interest rates are zero.


Speaker A: So if you need to borrow money, you can borrow money at zero anyway.

Speaker A: You don’t need to borrow money at zero from depositors.

Speaker A: Nowadays everything has changed.

Speaker A: Interest rates are very high and deposits are the one place where banks can borrow money at zero.

Speaker A: They’re the only place where banks can borrow money at zero.

Speaker A: They can go along with depositors, say, open up a checking account or even the savings account.

Speaker A: A lot of savings accounts are still paying like 0.1% interest.

Speaker A: And that’s effectively the borrowing rate that the banks are paying to borrow that money.


Speaker A: And suddenly that looks like free money that they can then turn around and just lend to the government at 5% and make a nice hefty profit.

Speaker C: That’s right.

Speaker C: There is starting to be some pressure on deposit costs for banks.

Speaker C: It’s happening a little bit more quickly than I think banks expected, actually.

Speaker C: But your big point about how most deposits are priced very cheaply still is absolutely true.

Speaker C: You really have to work too, as a consumer retail banking customer, you really have to work a little bit to get a more attractive rate.

Speaker C: And so banks are definitely in a mode of competing now to keep those cheap deposits.


Speaker B: So if they’re competing to keep deposits, but they also don’t want to pay really high interest rates to customers, how does that manifest in what they’re doing?

Speaker B: You shared with us one really interesting piece that said banks are charging higher rates to people savers in places where they don’t have a brick and mortar branch.

Speaker B: Like, if you want to put your money with Citibank, you can get like a 4% rate on your account provided you don’t live near a Citibank branch.

Speaker B: Is that like part of the new calculus they’re thinking about?

Speaker C: Yeah, I think banks are testing different things out to see sort of what they can get away with.


Speaker C: This is one thing that I hadn’t seen previously.

Speaker C: They’re trying to avoid sort of cannibalizing their existing really cheap deposits, the really low rates that they pay to most people.

Speaker C: So a few big banks have recently said, okay, if you open an online savings account, we’ll offer you somewhere in the range of 4%.


Speaker C: But the big caveat to it is you can’t live anywhere near a branch of ours.

Speaker C: If you do, you get 0.1 or 0.3%.

Speaker A: If I’m a Citibank customer who’s been banking with my local Citibank branch for the past 20 years, this is going to royally p*** me off.


Speaker A: Right?

Speaker A: I am your most loyal customer.

Speaker A: You’re offering me 0.1%.

Speaker A: And these Johnny come lately is in the middle of Iowa who have no relationship at all.

Speaker A: They get 4%, and that’s off limits to me.

Speaker A: How is this good in terms of customer relations?

Speaker C: Well, how many people who are Citibank customers know about this?

Speaker B: Oh, they’re going to find out.

Speaker B: I’m going to tell them.

Speaker D: They listen to Slate Money.

Speaker A: This is the genius of geotargeted advertising and marketing.

Speaker A: Right.

Speaker A: They send out all of the direct mailers and the online pop up ads only to people who live in the Midwest and where they don’t have any presence.

Speaker A: And those of us who live in New York just never even see that this product exists.

Speaker C: That’s right.

Speaker B: It’s pretty outrageous, isn’t it, Kevin?

Speaker A: Do you think this is like, scandalous or do you think it’s just funny?

Speaker C: Well, I think it’s a little bit scandalous.

Speaker C: We wrote about this recently and I wanted to know, is there any regulatory concern here?

Speaker C: I think there’s probably not.

Speaker C: Since we published the story about it, we certainly haven’t heard anything about a regulatory angle to it.


Speaker C: I think it’s purely a PR issue and maybe this segment will bring a little bit more attention to the issue, but I don’t think it’s really going to blow up as a scandal, even if it maybe should.

Speaker D: What are some other things that people are doing to sort of avoid this problem of cannibalization that you’re talking about?

Speaker C: Yeah, this is a little bit probably a little bit less controversial.

Speaker C: But the other thing we’ve noticed is offering, again, for online savings accounts, offering only the higher rate for new customers.

Speaker C: So if you’re an existing customer who has an online account with one of these banks, I don’t think it’s the big banks that have been doing this, but some of the online banks offer a higher rate to a new customer.

Speaker C: I think it’s in the guise of this is a new product, a new account that’s offering this higher rate.

Speaker C: So if you’re in the old account, you’re stuck in the lower rate.

Speaker C: You would have to proactively go open a new account.

Speaker B: That’s like my time subscription.

Speaker A: Exactly.

Speaker A: Once you’re logged in, Emily, I know you had this question, which is like the obvious way to prevent banks having being able to do this is to make it just very easy and free and common for people to switch their bank and to just move around to wherever the product is best.

Speaker A: And yet that is incredibly rare in the United States.

Speaker A: And there’s this urban myth that people are more likely to get divorced than they are to change banks, which, when I’ve tried to look into it, I think turns out to be false.


Speaker A: But like, it is incredibly rare for people to change banks.

Speaker A: And can you explain to me why that’s so rare when people are broadly so unhappy with their banks?

Speaker A: Is it just because they’re convinced that all banks are terrible?

Speaker C: Yeah, I don’t know that I have a full answer, but I think a big part of it is just that so many things are tied into our bank accounts.

Speaker C: Yeah, I think it’s become a lot harder to change banks than it was 20 years ago.

Speaker A: So as someone who recently changed banks, I can attest to this.

Speaker A: It basically took me a year to disentangle my old bank account from all of the random direct debits and people payments coming in and payments going out and stuff.

Speaker A: It’s insanely difficult.

Speaker A: Way harder than it should be.

Speaker A: Now, I just want to say that as a good European, in many European countries, it is incredibly easy to just port all of that over to a new bank.

Speaker A: You know, you don’t need to go up, you know, manually change your bank account information at every single credit card and employer and 1099 that you pay that you have.

Speaker A: You can just change your bank account and just say, like, all of the stuff that used to go to that bank account is now going to this bank account a different bank.

Speaker A: And it just happens automatically by technology that presumably the Federal Reserve could mandate some kind of open banking architecture in the United States that would make that possible here.

Speaker A: And they’re just too captured by the banking industry to ever do that.


Speaker C: Yeah, I think the CFPB has been looking at these issues, but they haven’t really come out with anything.

Speaker C: I don’t have a great explanation for why it hasn’t happened.

Speaker C: Industry capture.

Speaker A: Yeah, it’s partly industry capture, but I think I have another good reason, which is that in every country where I’ve seen this kind of innovation and it’s one of those few genuinely good financial innovations, it has been driven by the central bank.

Speaker A: The Central Bank of Sweden will say, this is what we’re doing, and then all the banks need to do it because the central bank is the main bank regulator in the United States.

Speaker A: There isn’t a central bank weirdly on earth.

Speaker A: There are twelve central banks.

Speaker A: We have twelve different Federal Reserve banks dotted around the country.

Speaker A: And then we have a board of governors of the, of the central bank that sits in Washington.

Speaker A: And it’s really not obvious where this kind of mandate would come from.

Speaker A: Like the Kansas City Fed has done a lot of work on instant payments and that’s all great, but they only have jurisdiction over that little bit of America.

Speaker A: And what we’re talking about here is by its nature a nationwide change.

Speaker A: And none of the American central banks, of which there are twelve, really has a mandate to make nationwide change.

Speaker C: Instant payments are actually an interesting sort of analog or analogy there.

Speaker C: The Fed is finally rolling out an instant payment system, I think in May.

Speaker C: Right.

Speaker C: And it took seven or eight years, something like that, maybe even longer, to sort of bring everyone under the tent to get that done.


Speaker C: There was a lot of opposition from the banking industry as well.

Speaker C: But other countries, many other countries have had real time payments through a central bank for a very long time.

Speaker B: So what will that look like when it goes into effect?

Speaker C: Yeah, essentially a lot of payments that get made today between banks run on what’s called the Automated Clearinghouse Network or Ach Network, which is decades old and takes several days in most cases.

Speaker C: The Clearing House, which is a company owned by the big banks, started a real time payments network a few years ago and now the Fed is starting its own, which will compete with it.

Speaker C: And there are going to probably be lots of different use cases b to B payments, B to C payments, payments from like, an insurance company to a consumer, payments from a consumer to a business.

Speaker C: And there’s also the possibility that it will become a big sort of consumer to consumer way to pay, which would sort of compete with the likes of Zelle and Venmo.

Speaker A: Yes.

Speaker A: Zele is an interesting one because it’s the bank’s attempt to basically or it was the bank’s attempt to kind of cut this off of the bus and say, we already have Zelle.

Speaker A: So you guys at the Fed don’t need to compete with us with an instant payment system.

Speaker A: But, Zelle, you need to sign up for it.

Speaker A: It’s kind of clunky.

Speaker A: No one likes it.

Speaker A: And you still have enormous numbers of people who use some even more clunky system, which involves having to sort of seed a completely separate wallet, whether it’s your Apple cash wallet or your Venmo wallet or your cash app.


Speaker A: Wallet where you need to put money into a whole different account in order to be able to send money from one person to another person.

Speaker A: Which, again, as a European, just seems completely insane to me.

Speaker A: No, I have my bank account.

Speaker A: If someone pays me, I want that money to come into my bank account.

Speaker A: If I’m paying someone else, I want that money to go into their bank account.

Speaker A: I don’t need it to go into their Venmo account.

Speaker A: And then they need to take the money out of their Venmo account and put it into their bank account.

Speaker A: That’s insane, right?

Speaker C: It is.

Speaker C: And to try to answer Emily’s question, this is going to be sort of think of the Feds network as sort of an underlying architecture for real time payments that applications will get built on top of.

Speaker A: Do you think that Venmo and PayPal and cash app and all of those their days are numbered and that people are going to migrate often back to just, I have a bank account.

Speaker A: Why do I need one of these things?

Speaker C: I really don’t know.

Speaker C: I’m sort of out of touch with the average cash app user.

Speaker C: I think the average Venmo user, perhaps.

Speaker C: I think people, while there are big network effects at this point built into those ecosystems, I think some people like the social aspects of them.

Speaker C: What do you think?

Speaker A: The hopeful part of me says that they will ultimately rearchitect themselves to live on top of those Fed instant payment layers, but that’s their profits up in smoke.


Speaker A: Right?

Speaker A: The way they make money is if I have a $600 balance in my Venmo account, that’s like a free loan from me to PayPal, which owns Venmo, and they make lots of money on that float.

Speaker A: If that money is sitting in my bank account rather than at PayPal, then that’s all of their profits.

Speaker A: So they’re not going to willingly just like, let me keep that money in my bank account rather than in my Venmo account.

Speaker A: They’re going to make it hard for me.

Speaker A: So it’s going to be a real fight for consumer habits.

Speaker B: I think in a high interest rate world, maybe the calculus changes.

Speaker B: Correct me if I’m wrong, but if you have cash sitting at Venmo, you’re not getting any interest on it.

Speaker A: Exactly.

Speaker B: So, I mean, that’s got to be worrying to those apps.

Speaker B: Even without Federal Reserve instant payments coming along, like, there’s more incentive than ever to switch banks to get out of Venmo, to get out of anywhere where you’re not getting interest on your cash right now.

Speaker C: Right?

Speaker C: I mean, do people have a lot of money in their Venmo accounts?

Speaker C: I guess maybe some do.

Speaker C: Or just cumulatively it adds up to something significant for PayPal.

Speaker A: Well, a cash app like that, you’re really pushing it as this is your bank account, just use this as your bank account.

Speaker A: We’ll give you a debit card you can use to spend the money out of it.

Speaker A: You can pay your paycheck into it at that point.


Speaker A: Yeah, it becomes your bank account.

Speaker A: You don’t even need a bank account anymore.

Speaker A: Maybe this is a good point actually, for us to have a quick break and then come back and ask you about Squarecashap and all of the other neobanks and whether they’ve really made a difference to a banking industry that doesn’t seem to have changed very much over the past few decades.

Speaker A: Some ads and then more slate money after these.

Speaker A: So one of the biggest headlines that has been crossing the wires and the newspapers over the past few months is the insane amounts of money that Goldman Sachs has managed to lose trying to build up a consumer bank called Marcus, which has now shrunk down to a fraction of what their original ambitions cash app seems to be doing quite well.

Speaker A: There’s a million other neobanks like Varrow and Chime and Aspiration and Dave, and they’re all basically offering the same product, which is we’ll give you a checking account.

Speaker A: You can pay your salary into it.

Speaker A: We’ll give you a debit card.

Speaker A: There are no fees.

Speaker A: That’s about it.

Speaker A: They’re more or less interchangeable in a bunch of different ways.

Speaker A: And the really big banks in America citibank, bank of America, JPMorgan Chase, Wells Fargo are still the really big banks in America, and there’s absolutely no sign that I can see that they are being really disrupted by all of these upstarts.

Speaker A: So has the great promise of a revolution in banking just signally failed to happen?

Speaker C: Yes.

Speaker C: I don’t think the big banks are feeling threatened by these neo banks.


Speaker C: As you said, they all offer fairly similar products which have limited revenue potential.

Speaker C: Frankly, they make money from debit interchange fees, which is just not really enough to build and sustain a robust business.

Speaker C: And they’ve been looking for ways to start offering more loans and make money that way.

Speaker C: But they’ve run into a number of different hurdles.

Speaker B: I think the Goldman Sachs Marcus thing I don’t know.

Speaker B: The complexities of why they couldn’t pull it off.

Speaker B: But my quibble is a marketing one.

Speaker B: Like if you’re Goldman Sachs and you want to start a product for the Masses, and you’re Goldman Sachs, just call it Goldman Sachs.

Speaker B: Everyone knows your brand.

Speaker A: That’s what they did on their main consumer product, which is the Apple card.

Speaker A: Right.

Speaker A: The Marcus brand doesn’t appear on the Apple card.

Speaker A: It says Goldman Sachs.

Speaker A: And I feel like the Apple card has been a little bit of a damp squib.

Speaker A: It came out with great fanfare and maybe people are using it.

Speaker A: But I’ve seen figures saying that Goldman Sachs has been losing a billion dollars a year on this credit card.

Speaker A: And it’s like, how on earth do you contrive to lose a billion dollars a year on a credit card?

Speaker A: There’s things for licenses to print money.

Speaker B: Yeah, I’m confused.

Speaker B: If you could shed some light on why Goldman is failing to do this basic stuff, I would be interested to know.

Speaker C: Apple just had a lot of leverage as they were negotiating a contract with a credit card issuer.


Speaker A: Yeah, I think they did force Goldman to provide a level of customer support that you don’t normally find in subprime credit cards.

Speaker A: And they forced it to be a subprime credit card.

Speaker A: They were like, you need to offer some kind of credit to everyone who applies.

Speaker A: You can’t just reject people or you can only reject a small number of people.

Speaker A: But then I think that the really big losses were basically just in terms of technology expenditure.

Speaker A: Right.

Speaker A: Someone high up in the chart in Goldman Sachs decided that the Marcus technology stack needed to be integrated into the Goldman Sachs mothership.

Speaker A: Technology stack?

Speaker A: And if you just make that kind of a decision, you can burn through a couple of billion dollars in no time.

Speaker C: Yeah, and that’s leaving aside the cost of building the original Marcus technology stack, which was pretty substantial, I think this ties in kind of with the neo banks.

Speaker C: Goldman and the neo banks.

Speaker C: One of the things that they were touting for some period of time was that we are going to have a competitive advantage over the big legacy banks because we don’t have these systems that have been cobbled together over the course of decades through mergers and all relies on this technology that’s from the 1970s.

Speaker C: We have this modern brand new technology stack that’s going to give us an advantage in the market.

Speaker C: My sense is that there may be some advantage that Goldman and the neo banks have in that regard, but it was not as big as maybe they hoped it would be.


Speaker A: I mean, it was clearly difficult enough for them to try and put it together that to this day they don’t have a checking account, which you’d think if you’re opening up a basic consumer facing bank that’s like kind of the first thing that you want to have.

Speaker C: Yes.

Speaker C: They don’t, and they’re not going to.

Speaker C: They’ve said that they’re scrapping the checking account entirely.

Speaker C: At this point, it’s all very fluid and it seems like the whole thing could be sold off relatively soon.

Speaker A: If they sold it, who would buy it?

Speaker C: I think the speculation is that one of the credit card issuers might be interested in buying at least the credit card parts of the business.

Speaker C: Those seem like the most obvious potential.

Speaker A: Buyers for me, the obvious buyer.

Speaker A: And this goes back to the weird regulatory mischievousness, to use a word that Emily loves that we have in the United States would be Walmart, right.

Speaker A: Walmart is a banking superpower in Mexico.

Speaker A: Walmart is very good at banking.

Speaker A: People go to Walmart all the time.

Speaker A: And Walmart has wanted to be a bank in America for decades.

Speaker A: And regulators have not allowed Walmart to become a bank for just as many decades because they say that if you’re a bank, you have to be a bank.

Speaker A: You can’t be a supermarket with a panc on the side.

Speaker A: Does that make sense to you?

Speaker C: Yeah, interestingly, the former head of Marcus left a few years ago to go to Walmart to build a consumer banking business there.


Speaker C: I think it’s still sort of unclear what their ambitions are, what they’re going to do with that business, but they have a connection to the average American in a way that Goldman Sachs never did and never will.

Speaker A: So yeah, let’s move on to that other grand part of many Americans childhoods, how they grew up, this beloved institution with a stage coach called Wells Fargo.

Speaker A: For years there’s been this steady drumbeat of scandal after scandal at Wells Fargo and how they were operating.

Speaker A: You just came out with this massive series looking into what happened there.

Speaker A: What’s the TLDI here?

Speaker A: What went wrong in this world where the big banks are seemingly completely entrenched and nothing can shake them off their pedestal.

Speaker A: Why did they seemingly feel the need to be so aggressive and cut so many corners?

Speaker B: Before we talk about it some more, can we just explain not everyone will remember the fake account scandal from Wells Fargo.

Speaker B: So basically, Wells Fargo was opening up bank accounts and credit card accounts and debit cards for people without the people knowing it or opening them up on behalf of their family members and friends.

Speaker B: Fake debit cards.

Speaker B: And sometimes people would get charged fees on cards they didn’t even know that they had.

Speaker B: And this was on the scale of, like, millions of people.

Speaker B: It was outrageous.

Speaker C: I think that what’s fascinating about the sort of phony account scandal to me is how did this spiral into this massive multi year situation that’s shaved tens and tens and tens of billions off the company’s market cap?


Speaker C: I think that they were very arrogant hubristic, and they had kind of drawn the lesson coming out of the financial crisis where they were kind of the golden bank, that they were a bit untouchable, that any problems they ran into would just be a relatively small fine, a cost of doing business.

Speaker C: And what happened was this fake account scandal sort of resonated with politicians and the public in a way that no one really anticipated, became really a huge story for a few months that sort of broke through into the mainstream.

Speaker C: And I think the regulators at that point sort of felt like they had egg on their faces, that they wanted to sort of fight back against the perception that they had been too cozy with Wells Fargo for a long time, and they really started sort of turning over stones and finding a lot of unpleasantness.

Speaker C: And six years later, Wells Fargo has this asset cap that they’ve been operating under for five years.

Speaker C: No end in sight.

Speaker C: One thing I’ve been curious about is why did this scandal, this fake account scandal, which, again, I wrote that big series about recently, why did it resonate with people, with the public in a way that other banking scandals have not?

Speaker C: I think if you ask the average person, tell me about the London whale scandal, you’d get a lot of blank stares.

Speaker C: But this scandal really resonated, don’t you think?

Speaker D: Part of it is because the average consumer can imagine being a victim of this.

Speaker D: They can imagine having Wells Fargo set up fake accounts for them.

Speaker A: And to Elizabeth’s point and I think this is actually a very interesting tension here, it is very easy to imagine, like, what the h***?


Speaker A: A bank opens up some account in my name, they start charging me fees on that account, I wind up paying them a whole bunch of money, and there’s nothing.

Speaker A: I can barely even find out about it until I weirdly, maybe notice something in the statement.

Speaker A: And intuitively, I think that’s like a kind of scary thing because the number one product that banks sell is trust.

Speaker A: They are a trustworthy place for you to keep your money.

Speaker A: And if you look at the architecture of banks, a lot of them are in big, solid stone buildings with columns on the front, and they’re like, we are a safe place.

Speaker A: And that kind of sense of trust and safety is completely the bedrock of most large banks.

Speaker A: And the idea that they would do something like rip you off and open up an account in your name without your knowledge and siphon off fees, it really undercuts that entire narrative.

Speaker A: The interesting thing to me is that that wasn’t really the incentive here.

Speaker A: They weren’t trying to siphon off fees from customers by opening up fake accounts in their names.

Speaker A: Most customers, like nearly everyone who had a fake account opened up in their name had no fees charged whatsoever.

Speaker A: There were a few exceptions, but mostly what this was was it was just a function of the incentive structure for the salespeople at Wells Fargo who, like, they would get extra commissions and bonuses if they opened up extra products for customers.

Speaker A: And they just wanted to get those extra commissions and bonuses, and their managers wanted to report lots of great account opening figures to the higher up.


Speaker A: And it was like this internal incentives issue which was the cause of the problem and the problem and the actual harm done to consumers.

Speaker A: Well, non zero was, I think, relatively small in the grand scheme of things.

Speaker C: I would quibble with just one thing you said there, Felix, which is it really wasn’t about getting commissions and bonuses for most of these low level people.

Speaker C: It was about avoiding getting fired.

Speaker C: They were worried about losing their job.

Speaker C: But to your bigger point, I completely agree.

Speaker C: I think that this was really more of a labor scandal.

Speaker C: The true victims were the employees, not the consumers.

Speaker C: Although, as you said, there were some consumers who paid some additional fees that they shouldn’t have paid.

Speaker C: But these low level workers, many of them did lose their jobs.

Speaker C: Others sort of suffered for years through these sort of atrocious working conditions in which they were being sort of pressured to use these shady sales tactics.

Speaker C: Everyone at the bottom of the bank, at the bottom of the retail bank suffered in a lot of different ways.

Speaker C: One thing someone said to me recently, which I hadn’t really thought about, was as a sort of alternative theory for why this this scandal resonated was no one at the top of the bank lost their job?

Speaker C: Everyone at the bottom of the bank did.

Speaker C: Obviously, there have been some consequences for some of the people at the top.

Speaker C: A lot of the top executives are gone.

Speaker C: There were claw backs in some cases.

Speaker C: Some of them have had to pay multimillion dollar fines.


Speaker C: But even those people at the top, those top.

Speaker C: Executives are still doing pretty well.

Speaker C: I think in most cases.

Speaker A: No one went to jail.

Speaker C: No one went to jail.

Speaker A: But I want to ask you as well, to what degree was this like, the mother of all regulatory f*** ups?

Speaker A: Like, every single major bank has the OCC, the FDIC, and any number of other alphabet super regulators, not just like, up in its ship, but literally on site, physically inhabiting offices in the bank, making sure they are looking at what is going on there, and they’re comfortable with what is going on there.

Speaker A: How on earth did they miss this?

Speaker C: Well, yeah, I think to answer your question, it’s the mother of all regulatory f*** ups.

Speaker C: They didn’t really miss it.

Speaker C: They knew a lot, but they didn’t do much about it.

Speaker C: They didn’t really hold Wells Fargo accountable for it.

Speaker C: And the way it played out, the way the story played out is actually really interesting in retrospect.

Speaker C: There was a tip to an La Times reporter in 2013 by one of these low level employees who got fired, which led to, like, a short article in the La Times in 2013.

Speaker C: And there was a kind of a follow up article by the same reporter scout record a couple of months later that sort of showed this was a bigger issue.

Speaker C: And that caught the attention of a local prosecutor here in Los Angeles where I live.

Speaker C: And 18 months after that, his office filed a lawsuit against Wells Fargo.


Speaker C: It was only at that point that the regulators really woke up and started doing stuff.

Speaker C: And I think at that point, they probably saw this was out of their control.

Speaker C: There were other parties that had some power that were digging into this, and the regulators realized that they needed to probably start doing something themselves.

Speaker B: It’s such a weird scandal.

Speaker B: When I was reading your series.

Speaker B: There’s no, like I mean, the reason you explained there are these perverse incentives that force really low level workers to open up a bunch of fake accounts to keep their jobs.

Speaker B: But it wasn’t some intentional scam or manipulation or whatever the London Whale was, which I swear I know what it was.

Speaker B: And then it flies out of my head the next day.

Speaker B: But there’s nothing clever or strategic about it.

Speaker B: It’s just like this, like, messy, bad management, bad culture scandal.

Speaker C: Right?

Speaker C: Yeah.

Speaker C: I think that there’s no question that there was very little focus on consumer protection prior to the formation of the CFPB.

Speaker C: And these regulators were looking at all of this through the lens of what they call safety and soundness, which is essentially ensuring that the bank remains profitable.

Speaker C: No one at the bank or in the regulatory agencies foresaw the possibility that this scandal would turn into something that would undermine Wells Fargo’s profitability in serious.

Speaker A: Ways, mainly because they need to pay out $10 billion in fines.

Speaker C: Right.

Speaker C: And they were forced by the regulators to overhaul their systems, their risk management, and all kinds of internal controls in major ways which are still ongoing and have cost enormous, enormous amounts of money.


Speaker B: Such an amazing scandal.

Speaker B: There’s one part of your article where they’re talking about how the low level workers are getting fired because they’re making up these bank accounts and debit cards or whatever.

Speaker B: And the executives around the table, their instincts, what they wanted to do to solve the problem was, like, not fire them as much.

Speaker C: Right?

Speaker A: I mean, at least they wouldn’t have gotten fired is pareto optimal, right?

Speaker A: If people are going to be making up accounts anyway, at least don’t fire them for the things you’re forcing them to do.

Speaker B: Yeah, they’re like, this is okay.

Speaker B: It’s okay to make up accounts.

Speaker B: What’s not okay is to fire people for it.

Speaker B: And you’re kind of like, that does make sense.

Speaker A: So we need some ads, but we’ll be straight back.

Speaker A: We should have a numbers round, but let’s start with Elizabeth.

Speaker A: Do you have a number?

Speaker D: Sure.

Speaker D: My number is 50.

Speaker D: And it’s a percentage or it’s not an exact percentage over 50%.

Speaker D: And that’s the gains in the number of corporate work phone accounts for Verizon and Charter last year, because apparently now employers are worried about security a little bit more because of TikTok and things like that, and they want to cut off employee access to certain apps.

Speaker D: So we’re going back to what I think of as the late 90s, early aughts period, where everybody walked around with the phone and a BlackBerry, and now we’re back to the, you know, two phones per employee.


Speaker B: That’s great.

Speaker B: I really don’t like how employers now are like, just use your own phone and and we’ll pay for some of it.

Speaker B: What is that?

Speaker B: No, I want you to pay for the phone I’m using for work.

Speaker B: Why is that so crazy?

Speaker B: I like this.

Speaker A: Yeah.

Speaker A: It’s like, who is ever going to get around to itemizing their international phone calls and billing them for their company?

Speaker A: No one ever does that.

Speaker B: And then also you’re using your personal device for work stuff and it’s all mingled up, and then it can all.

Speaker A: Get subpoenaed and your work and be like, yeah, why is this a thing?

Speaker A: Let’s go back to give me my BlackBerry back.

Speaker B: I want a BlackBerry.

Speaker D: I miss my BlackBerry.

Speaker B: Yeah.

Speaker A: My number is 4.5 million, which is the number of dollars that dan Snyder, who’s the owner of the Washington Commanders football American football team, charged the Washington Commanders football team for the privilege of having their logo on his private jet.

Speaker B: What?

Speaker D: This is why he’s rich and I’m not.

Speaker A: Exactly.

Speaker A: This is a bit like Adam Newman charging we work for the right to the weed copyright or whatever.

Speaker A: Yeah, he painted the logo of his football team on his private jet, which normally is the payment goes the other way.

Speaker A: Right.

Speaker A: Like when JetBlue had a New York Jets livery.

Speaker A: That was because JetBlue was paying the New York Jets.


Speaker A: Not because the New York Jets were paying JetBlue.

Speaker A: But in this case, Dan Snyder paints the Washington commander’s logo on his private jet.

Speaker A: And then he’s like, well, that’s free advertising for you, so pay me four and a half million dollars.

Speaker B: But he owns them like a Trump move.

Speaker A: He owned most of them, but there were minority investors and the minority investors were like, why are we paying you millions of dollars that’s having the logo on your private jet?

Speaker B: Emily my number is 20.

Speaker B: That is about the number of years a man who lives in Connecticut named Joseph de Ruvo Jr.

Speaker B: Has not been wearing shoes.

Speaker B: I bet Elizabeth knows this.

Speaker B: There was a feature article by katherine rossman, who’s a wonderful new york times reporter in the new york times.

Speaker B: It’s at least 2000 words.

Speaker B: And it is about this guy Joseph, who doesn’t wear shoes and lives in Connecticut.

Speaker B: I don’t know what to say.

Speaker B: He had bunions and he was like, you know what?

Speaker B: Shoes hurt me and I’m done with them.

Speaker D: Factually is.

Speaker A: I mean, it makes it a lot easier when you’re going through security checks at the airport.

Speaker A: Right?

Speaker B: Yes.

Speaker B: Though that was not the reason.

Speaker B: But it is a benefit.

Speaker A: So does he get onto planes without shoes?

Speaker B: Interestingly.

Speaker B: The piece, though it is long, does not mention his plane travel.

Speaker B: He goes into stores without shoes, and apparently in Connecticut that’s okay.


Speaker B: Which I didn’t realize.

Speaker B: And I saw someone recently at the supermarket without shoes, and I was like, what the h*** is happening in this country?

Speaker B: No, I wasn’t like that, but I kind of was a little because it was February.

Speaker A: So in the winter, when there’s like, loads of snow on the ground, he just goes out anyway without any shoes on?

Speaker B: Yes.

Speaker B: And in the summer, when it’s, like, real hot, he says in the summer it gets even trickier.

Speaker B: He has to, like, stay on the grass.

Speaker B: You know, he can’t be running in the streets and stuff because he runs.

Speaker D: Where does he wear socks?

Speaker B: Or is he just elizabeth no, he said he carries he carries sandals in his car.

Speaker B: Like, if he’s out to dinner with friends because he doesn’t want to disrupt the meal if he has to get kicked out.

Speaker B: So he has, like, a backup sandals for those occasions.

Speaker A: But that’s it amazing.

Speaker A: Kevin, bring us home.

Speaker A: What’s your number?

Speaker C: My number is 18 million to bring it back to Wells Fargo.

Speaker C: 18 million was the number of accounts opened at Wells Fargo over, like, a 14 year period with zero customer initiated transactions.

Speaker C: Meaning they were opened in the name of a customer, but the customer never made a transaction.

Speaker C: That was about 10% of all checking and savings accounts opened at Wells Fargo during that period of time.

Speaker B: 10%.

Speaker B: That’s crazy.

Speaker B: What happened.

Speaker A: I feel like if I’m a manager, I’m like, 10%.


Speaker A: This isn’t up and to the right, I want it to be 90%.

Speaker B: Turns out they had no customers.

Speaker A: Why?

Speaker A: Why do we need custom real customers when we can have fake ones?

Speaker A: Something revenues.

Speaker A: But yeah, seriously, I think that’s it for Slate Money this week.

Speaker A: Kevin, thanks so much for joining us.

Speaker C: Thank you.

Speaker C: It’s been great.

Speaker A: And thanks Anna for producing.

Speaker A: We are going to have a Slate Plus segment.

Speaker A: There’s a question I want to ask Kevin about the asset side of bank balance sheet.

Speaker A: It’s not the liabilities deposits but the assets, which is their loans and bonds and things.

Speaker A: We’re going to cover that in Slate Plus.

Speaker A: But other than that, thanks for listening and we will be back next week with more slate money.

Speaker A: Okay, Kevin, we can go a little bit nerdy here in Slate Plus.

Speaker A: So let me ask you about Silicon Valley Bank, which isn’t really a retail bank, but bear with me here.

Speaker A: Silicon Valley Bank in 2021, obviously a bank, silicon Valley silicon Valley had lots of money.

Speaker A: We, you know, lots of money sloshing around the VC verse.

Speaker A: Silicon Valley Bank’s customers had like $200 billion of deposits, almost anyway.

Speaker A: A lot of deposits.

Speaker A: And they were sitting on loyalty’s deposits and they’re like, what are we going to do with these deposits?

Speaker A: And they said, well, why don’t we buy something really safe with them?

Speaker A: So they put it all into federal mortgage, mortgage bonds, basically Fannie Mae and Freddie Mac agency bonds.


Speaker A: And they wound up buying $91 billion worth of these mortgage bonds and they were like, that’s nice and safe, so we don’t need to worry about losing that money.

Speaker A: But of course, when they bought the bonds, interest rates were like 2% and now interest rates were 6%.

Speaker A: And that $91 billion of mortgage bonds, if they had to sell them on the open market, would now fetch $76 billion, which is a loss of $15 billion.

Speaker A: And $15 billion is more than the entire profits since inception 30 years ago of Silicon Valley Bank.

Speaker A: Now under us.

Speaker A: GAAP accounting principles, they don’t actually need to mark that loss to market.

Speaker A: They can say, well, these are all held to maturity, so it doesn’t matter.

Speaker A: But still, what we are seeing with this big rise in interest rates is that all of the bonds and long term loans that banks have if they’re not held to maturity or even if they are held to maturity, are worth a lot less than they used to be.

Speaker A: And that’s bad for banks.

Speaker C: Yeah, absolutely.

Speaker C: I don’t think that the problem is as serious at most banks as it sounds like it is in Silicon Valley.

Speaker C: But there are a lot of banks that made similar plays buying securities with deposits in a low interest rate environment.

Speaker A: Even if it’s just mortgages.

Speaker A: Right.

Speaker A: That mortgage, if you need to sell it, is worth a h*** of a lot less than you actually lent out when you first made the loan.

Speaker A: Let’s say that I’m the bank of Felix and I give Emily a mortgage for a million dollars to buy her million dollar house in Westchester, and she pays a two and a half percent mortgage rate because that’s what mortgage rates were back in 2021.


Speaker A: And so I’ve given her a million dollars.

Speaker A: I’m out $1 million.

Speaker A: That’s like her asset now.

Speaker A: It’s not mine.

Speaker A: And then in return, what I get is this note, this mortgage note, which I mark on my books as being worth a million dollars, and she pays it back over the next 30 years at two and a half percent.

Speaker A: There’s a secondary market in mortgage notes where I can take that loan and I can sell it to someone else.

Speaker A: If I sell it on the day I make it, I can probably sell it for like a million dollars in change and make a small profit on selling it off to someone else.

Speaker A: But let’s say I held onto it and kept it on my balance sheet.

Speaker A: If I tried to sell that mortgage note today, I could probably only get $850,000 for it because the buyer is going to want a 6% interest rate, not a two and a half percent interest rate.

Speaker A: And so I have lost $150,000 on that mortgage.

Speaker C: Right?

Speaker C: Yeah.

Speaker C: I think for most banks that are in the mortgage business, they’re offloading the risk immediately to Fannie and Freddie.

Speaker C: But certainly in the jumbo market, the million dollar house that Emily is buying in Westchester, banks do tend to keep those on their balance sheet more frequently.

Speaker C: And you’re right, if they were to sell those loans right now, it would be at a loss.

Speaker C: But that’s why they won’t be selling them, I think, for the most part.


Speaker C: Right.

Speaker C: They don’t have to take an accounting loss on it at this point.

Speaker A: It’s even worse than that if they can’t sell any of them, because if they sell any of them, they suddenly have to start marking all of them to market.

Speaker C: Okay.

Speaker A: So they can’t rate because suddenly they’re like, the regulators are like, well, or the accountants are like, well, if you’re selling that now, then you’re not obviously not holding it to maturity.

Speaker A: Right, because it hasn’t matured.

Speaker A: And so all of this other stuff say you’re holding to maturity, you’re not really holding to maturity either.

Speaker A: So all of that needs to get mark to market and you suddenly need to take this multi billion dollar loss.

Speaker C: Yeah, I didn’t realize that wrinkle in how the accounting rules work, but that seems like it gives the banks an enormous incentive to hold on to all of it.

Speaker C: Right, right.

Speaker B: I just am not clear how big of an issue this really is.

Speaker B: I mean, obviously it’s an issue for Silicon Valley Bank, but most of the mortgage lending that gets done in the US now is not done by banks.

Speaker B: I think they have like 40% of the market.

Speaker B: I’m not saying they don’t hold MBS or whatever, but what’s the market?

Speaker C: Yeah.

Speaker C: No, and most of what they do, most of the loans they do make, you know, they’re selling to Fannie and.

Speaker A: Freddie right away, but they still have balance sheets.

Speaker A: Right.


Speaker A: There’s still a massive amount of bonds and loans and other forms of debt instrument on the asset side of these balance sheet.

Speaker B: That’s what I’m saying.

Speaker A: What’s the universe and that balance sheet in some form or another has gone down in value as a result of rising interest rates.

Speaker C: Right?

Speaker C: Yeah.

Speaker C: And I think the Silicon Valley Bank example seems like a bit of an extreme case, but I do think that bank treasurers were kind of aware of this likelihood for a number of years and generally took some steps to sort of prepare.

Speaker A: They were playing in the interest rate derivatives market and they managed to make a whole bunch of money on rate forwards.

Speaker A: I don’t think so.

Speaker B: So you think this is like a Vestering issue?

Speaker A: Okay, here’s the thing.

Speaker A: The reason why Silvergate Bank became insolvent is because there was a bunch of deposit withdrawals for like crypto related reasons.

Speaker A: And those deposit withdrawals forced Silvergate to have to liquidate a bunch of its assets in order to meet those redemption deposit redemption requests.

Speaker A: Any bank and Silvergate was much more have much more well capitalized than any pretty much any other bank in America.

Speaker A: Any bank in America.

Speaker A: This is my hypothesis is that basically any bank of America, if it faced a large amount of withdrawals from its deposit base, at least the banks with deposit bases would run the risk of becoming insolvent pretty quickly, because at some point, they would need to start selling some of those hold to maturity assets in order to meet those deposit.


Speaker A: Redemptions.

Speaker A: And the minute you do that, you have to mark everything to market and the minute you do that, you’re insolvent.

Speaker A: I think there is that systemic risk in the banking sector and so long as people don’t withdraw their money from banks, everything is fine.

Speaker A: But I do think that almost pretty much every bank in America is weirdly susceptible to a bank run right now because it does have this deep insolvency on its balance sheet which is hidden by gap.

Speaker C: Yeah, I don’t think all assets on bank’s balance sheets are it would be an exaggeration to make it sound like all bank all assets on bank balance sheets are fixed yeah.

Speaker C: Not repricing upward.

Speaker A: Yeah.

Speaker A: Banks do like to make floating rate loans for precisely this reason.

Speaker A: Right.

Speaker A: And there’s a lot of libor instruments and sofa instruments and that kind of stuff, which are precisely designed so that when interest rates go up, the banks make more money instead of losing money.

Speaker A: So that’s a good point.

Speaker C: Yeah.

Speaker C: But your broad point about the susceptibility to a bank run in a rising rate environment, I think is well taken.

Speaker C: I don’t think that there’s much reason to worry about banks that don’t have a really kind of volatile deposit base like Silvergate did.

Speaker A: Yeah.

Speaker A: One of the interesting things that you mentioned is that when banks originate mortgages, they generally sell them on to Fannie and Freddie.

Speaker C: Right.

Speaker A: The flip side of that is that a lot of banks, not just Silicon Valley Bank, wind up with a pretty large portfolio of agency bonds of Fannie and Freddie bonds which are issued by Fannie and Freddie.

Speaker A: And those bonds have gone down in value and they’ve gone down in value for two reasons.

Speaker A: One of the reasons they’ve gone down in value is that rates have gone up.

Speaker A: And if you have a bond, then if rates go up, then prices go down.

Speaker A: But the other reason they’ve gone down in value is because the duration on those bonds has gone way up.

Speaker A: People expected that most mortgages would refinance or people would move or whatever after five, six years in their house.

Speaker A: Now everyone’s locked into their home and wild horses couldn’t persuade them to get rid of this amazing mortgage that they have for the next 30 years.

Speaker A: And so those mortgages are going to wind up.

Speaker A: Instead of having an average life of five years, they’re going to have an average life of 15 years.

Speaker A: And that is going to, in turn, bring the duration up and make the value of those bonds even lower.

Speaker C: Do you think we’re in a rising rate environment for a long period of time here?

Speaker C: This could turn around.

Speaker C: Right.

Speaker A: I don’t think rates will be rising much from here, but they don’t need to, right?

Speaker A: So long as they’re significantly higher than most people’s mortgages, people aren’t going to want to move.

Speaker C: True.

Speaker B: They’ll eventually die, though.

Speaker A: There you go.

Speaker A: You know what?

Speaker A: This is the one thing that’s going to save the banks is the boomers dying and paying off their mortgages.

Speaker A: That way, if nothing else will save the banks, death will.

Speaker A: Kevin, thank you so much for joining us on Slate Bliss.

Speaker C: Thank you, Felix.