Gertrude Stein––who shaped 20th century art and literature through discussions in her 1920s Paris home with the likes of Pablo Picasso and Ernest Hemingway––famously wrote of Oakland, California, “There is no there, there.” Had she lived until September 2016, she might have said the same about consumer accounts in the mega bank across the bay in San Francisco. Wells Fargo entered 2016 in an enviable position. The bank easily weathered the 2008 financial crisis by remaining focused on its core business––retail banking in bricks-and mortar branches. In July 2015, U.S. News and World Report touted Wells as the “best bank stock today,” and in February 2016, The Banker awarded the distinction of “most valuable brand in banking” for the fourth consecutive year. Shrewd acquisitions and a knack for cross-selling vaulted Wells into the company of the world’s largest banks––a long way from its start as part bank, part stagecoach in the 1850s. Then, on September 8, 2016, the stagecoach threw a wheel––news broke that aggressive sales quotas had driven Wells employees to open millions of unauthorized accounts. When the dust settled, CEO John Stumpf was out, and the bank faced a $185 million fine from the Consumer Financial Protection Bureau in addition to $110 million in civil settlements with wronged customers. Even worse, consumer faith earned over 164 years was badly shaken. Wells Fargo became the largest business to ever lose accreditation with the Better Business Bureau. The account scandal had broader financial consequences. In the month following disclosure, the price of Wells’s stock tumbled 13.5% as damaging details emerged. Then on October 18, in an uncommon move for an investment-grade firm, Wells Fargo postponed its planned issue of new 10-year bonds when S&P Global Ratings raised the likelihood of a downgrade in the bank’s credit rating. At the time, comparable Wells’s debt offered a yield 162 basis points (100 bps = 1 percentage point) over Treasuries––up from 151 before the scandal broke. The bank’s weighted average cost of capital rose as well, reflecting a higher beta on common stock on top of the higher risk premium on debt. Going into 2016, Wells had not reported a loss in 45 years––a record in part traceable to emphasis on consumer financial products and services, which rank among the most steady business lines for commercial banks. This emphasis helps account for the low beta on Wells Fargo common stock, 0.9 in August 2016––meaning Wells stock was less risky than the average stock (beta = 1) as well as the stocks of other mega banks like Bank of America (beta = 1.6). But bad publicity from the scandal together with Wells’ decision to end sales quotas produced a 40% drop in new checking accounts in 2016 and a 43% falloff in credit-card applications. Such declines go far to explain why Wells’ beta climbed to 1.0 by year-end 2016. 

Many feel only muscular government regulation––supported by severe punishment for transgressions–– can deter corporations from unethical acts. How did markets punish Wells Fargo? In your opinion, how much of a role should markets play in policing corporate ethics?