The Failure of Dodd-Frank

[Celerity]

‘Too big to fail’ is more pervasive and regulation more captured than ever. What went wrong?

https://prospect.org/economy/2023-09-19-failure-of-dodd-frank/



Beginning in 2011, Wells Fargo, today the country’s fourth-largest bank, launched a cross-selling plan to persuade existing bank customers to buy other products. This dubious but legal business model metastasized into a scheme where the bank opened extra checking and savings accounts and provided credit cards without the customer’s consent. The number of fraudulent accounts eventually totaled more than three million. That gross fraud produced excess costs to consumers, lucrative fees for the bank, and fat paydays for bank executives, particularly through their stock options. The cross-selling scheme was mostly an attempt to prove to investors that the company was growing, and as the stock rose, executives who were paid through equity awards benefited.

When the scheme unraveled, two Wells Fargo CEOs were eventually forced out. Some 5,600 low-level employees, who had been pressured by their managers to carry out the illegal ploy, were scapegoated and lost their jobs. The bank paid fines in the hundreds of millions. One senior executive, who was responsible for executing the design and aggressively pressuring employees to carry it out, faced criminal charges. But last Friday, Carrie Tolstedt, the chief of the bank’s retail operations for a decade, managed to avoid prison time, continuing a long pattern in which senior bankers, who create gross frauds and cause the suffering of millions of people, never go to jail.

Tolstedt was sentenced by a federal judge in Los Angeles to three years’ probation, six months of home confinement, 120 hours of community service, and a token fine of $100,000. (Previously, Tolstedt paid a $17 million fine to settle separate charges with the Office of the Comptroller of the Currency, which makes that $100,000 fine look even more ineffectual.) The judge, Josephine Staton, was an Obama appointee. The Justice Department, which launches criminal prosecutions of bankers with the greatest reluctance, had prosecuted Tolstedt for the most minor of several possible offenses, failure to cooperate with regulators. In March, Tolstedt agreed to a plea bargain that might have included jail, but didn’t.



Tolstedt’s avoidance of prison is the perfect symbol of a bank regulatory and accountability system that is still broken, 15 years after the great financial collapse and 13 years after the Dodd-Frank Act supposedly ended “too big to fail.” It did not. Today’s big banks are bigger and more concentrated than ever. They take excessive risks in order to fatten executive pay, knowing that government will have to bail them out if they get into trouble, because of the catastrophic risk of systemic contagion. This was exactly the script that government followed after the collapse in 2008, and the script that Dodd-Frank was supposed to prevent ever recurring: Privatize the gain, socialize the loss.

snip