Meaningful Returns

Maybe you’ve seen this; maybe you haven’t. But Wells Fargo was fined $185 million yesterday by a collection of regulators for fraudulently opening up two million unnecessary accounts for its “valued customers,” simply because new accounts means new fees. And this wasn’t the result of two or three rogue branches–like, I’ve always wondered why the branch on Fairview in Five Points is so much nicer than all the others, it has wood shingles for crying out loud–but no, this was so widespread that more than 5,000 employees were fired on the spot for it. And if 5,000 were fired, you would have to imagine that closer to 10,000 new exactly–or at least approximately–what was going on.

Unfortunately this doesn’t come as much surprise to many folks who pay attention to the finance industry (or any industry for that matter). As Josh Brown said this morning, “Incentives explain everything,” and like the genius Matt Levine observed:

You get what you measure, but only exactly what you measure. There’s no guarantee that you’ll get the more general good thing that you thought you were approximately measuring. If you want hard workers and measure hours worked, you’ll get a lot of workers surfing the internet until midnight. If you want low banking bonuses and measure bonus-to-base-salary ratios, you’ll get high base salaries. Measurement is sort of an evil genie: It grants your wishes, but it takes them just a bit too literally.

Wells Fargo wanted to incentivize the cross-selling of products to its customers, and that is exactly what it got, so on the one hand incentives are of course very effective. But also, Wells Fargo opened up two million unnecessary accounts, so on the other hand incentives can be really tricky.

The lesson, in general, is to ALWAYS be on the lookout for conflicts of interest and incentives. They are everywhere and they aren’t inherently bad, but if you don’t pay attention you will get fleeced. The lesson, more specifically, is to be careful with your banking relationship. This idea of cross-selling is ubiquitous at every single bank you’ve ever heard of.