Breakingviews: Wells serves Wall Street warning about Main Street

Published Thu, Oct 13 20164:36 PM EDT

Breakingviews

Antony Currie

Wells Fargo has served Wall Street a warning about venturing onto Main Street. The financial impact of the California-based bank's fake-accounts scandal is small. But its nature and the lender's poor response sealed Chief Executive John Stumpf's fate. The retail units being built at Goldman Sachs and Morgan Stanley provide diversification, but also create new risks. Stumpf's exit, announced on Wednesday, is hard to comprehend based purely on the bottom line. Wells Fargo set aside just $5 million to compensate customers – a miniscule amount compared to the tens of billions of dollars the likes of Citigroup and Bank of America lost on dodgy mortgages and paid in consumer restitution later on. These two and other large rivals also had to fork over billions in fines, whereas watchdogs dinged Wells Fargo for just $185 million. More from Breakingviews : Money-fund pricing artifice defies belatedreform Other large numbers explain the problem better. Wells Fargo's bankers opened as many as 2 million fake bank and credit-card accounts, and 5,300 employees were fired for their part in the scandal. What's more, the whole affair happened over a five-year period, with some evidence suggesting the practice dates back well before 2011. Couching the mess in those terms implies a long-term institutional problem and a failure of risk management and leadership at all levels of the bank. And the extra unwanted accounts, potentially a factor in hundreds of thousands of people's credit scores, affected ordinary consumers directly. That's too much for regulators and lawmakers to ignore. Wells Fargo and Stumpf compounded the problem by being slow to react and even blaming junior employees. Goldman launched its online consumer-lending business – called Marcus – on Thursday. The bank and its rival Morgan Stanley have their reasons for jumping into the retail business. It adds a new earnings stream; it's relatively cost-effective since neither firm plans to open hundreds of branches; deposits are a cheap source of funds; and it might even help broaden their public image beyond being just an aloof wholesale bank. Yet the new businesses are unlikely to be more than a footnote to earnings for some time. And as Wells Fargo and Stumpf have just discovered, the downside of making mistakes in retail banking can outweigh some of the benefits. For more independent commentary and analysis from Reuters Breakingviews, visit breakingviews.com

A Wells Fargo bank branch in New York City.

Scott Mlyn | CNBC