Wells Fargo, Glass-Steagall and 'Do you want fries with that?' banking
© Victoria Sarno Jordan

You might not see the connection at first, but two bank-related matters that have made headlines of late are quite closely connected. The first matter is what I call "Do You Want Fries with That?" banking — the practice of "cross-selling" unwanted products to captive customers that has now landed Wells Fargo in hot water. The second matter is the Glass-Steagall Act — a New Deal era statute that, in the wake of the great stock market crash of 1929, separated depository banking institutions from high-rolling Wall Street financial firms until its repeal in 1999.

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"Fries with That" banking is making news at the moment thanks to recent revelations that thousands of Wells Fargo employees, under pressure from higher management to cross-sell up to eight "products" per customer, have been opening phantom accounts for customers who have not asked for them. Because customers are charged fees for each "product" they receive, and because the practice of opening phantom accounts often involves misuse and misappropriation of confidential client information, the charges against Wells Fargo are both serious and apt to result in quite costly lawsuits. And this will be atop the $185 million fine that the Department of Justice has already announced it will levy on Wells Fargo.

Glass-Steagall, for its part, has been making news — again – periodically over the past several years for several reasons. The most conspicuous such reason is the crash of 2008-09, which many have blamed in significant measure on Glass-Steagall's repeal in 1999. But there have been other reasons in recent years. Sens. Elizabeth WarrenElizabeth Ann WarrenGOP senators rebuke Trump for using 'Wounded Knee' as 'punchline' Julián Castro: Trump has 'contributed to more racial strife' in the US Gillibrand to kickstart 2020 White House bid before weekend Iowa trip MORE (D-Mass.) and John McCainJohn Sidney McCainTrump is right: Walls work on the southern border How news media omissions distort Russia probe narrative ... and shield Democrats Arizona city council halts work on mural honoring John McCain over ‘protocol’ concerns, neighbor complaints MORE (R-Ariz.), for example, introduced the 21st Century Glass-Steagall Act in the summer of 2013, and have periodically touted it ever since. Then over 2015 and 2016, presidential candidates Sen. Bernie Sanders (I-Vt., running in the Democratic primary) and Republican Donald TrumpDonald John TrumpHouse Freedom Caucus calls for Congress to work on shutdown through break Democrat previews Mueller questions for Trump’s AG nominee Trump inaugural committee spent ,000 on makeup for aides: report MORE both called for enactment of an updated Glass-Steagall Act.

Finally, last week, the Federal Reserve Board called for at least a partial return to Glass-Steagall-style separations between depository banking and more risky financial activities, in a report recommending that Main Street banks no longer be permitted to affiliate with Wall Street private equity concerns.

But now how might these two matters connect, you might ask. If you ask this, you're probably thinking that Glass-Steagall was and is prompted by one basic concern — the concern to insulate depository institutions, which hold Mom and Pop's hard earnings and make up the backbone of our payments system, from high-risk Wall Street financial practices. If so, you're in good company — and neither you nor that good company are altogether wrong. Glass-Steagall was, and is, prompted in part by that very concern. But it was — and is — also prompted by more. What more?

Another of Glass-Steagall's concerns was to limit the cheap funds that bank affiliates would make available to speculative non-bank investors whose activities inflate asset price bubbles like those which burst in 1929 and 2008. Yet another was to maintain market integrity, which is easily compromised when too few firms control too much finance. And yet another was to maintain a level playing-field among non-financial firms operating in the "real" economy, since firms of that sort held by financial conglomerates always enjoy unearned funding advantages.

But I still haven't finished. For there are at least two more concerns that prompt calls for reenactment of Glass-Steagall — and these two take us straight on to Wells Fargo and its "Fries with That" banking practices. So what I'll call the fifth aim that prompts calls for Glass-Steagall reenactment is to insulate Main Street depository institutions from what we might call the high-rolling, high-pressure culture of Wall Street financial firms. And what I'll call the sixth (and related) aim is to limit the complexity of financial institutions, which can quickly become ungovernable even by their own officers and directors, let alone outside regulators, when their operations become too far-flung and multifarious.

Now as I say, it is these latter two Glass-Steagall-prompting concerns that Wells Fargo's "Fries with That" banking model implicates. How? There are at least two ways. The first has to do with the "products" — or, in Wells Fargo-speak, "solutions" — that Wells Fargo has been cross-selling. Recall that I mentioned that Wells Fargo's goal was for each of its clients to be sold at least eight of these products. But now ask yourself, how could you possibly buy eight distinct products from your local depository institution? What, beyond a checking account, a savings account, a credit card and perhaps one more item, could these be?

The answer, it turns out, is that many of the "other products" are items that Glass-Steagall would have prohibited banks from having much, if anything, to do with prior to its repeal in 1999. These include things like life insurance annuities, more general "risk management services" (a term, of course, that embraces derivatives purchases), "investment advisory" services, and similar financial products that used to be offered not by banks or bank-affiliated entities, but by other, more high-end financial firms that Glass-Steagall expressly segregated from depository institutions.

Opening the door to bank sales of such products yields at least two related problematic effects. One is that ordinary bank customers, whose degrees of financial sophistication suit them for bank accounts and associated bank cards but not for high-end, high-risk "investment products," are apt to be offered such "products" by people who used simply to assist them with managing more Main Street-style bank and checking accounts. The other is that these same salespeople are apt to become more and more like high-pressure Wall Street operators, since the bank's goal now becomes that of selling as many distinct "products" as possible to one's customers — and since the higher-end "products" tend to earn much more for their sellers than do traditional bank products like checking and savings accounts.

So that is how the latest Wells Fargo scandal implicates Glass-Steagall's banking culture concern. How about Glass-Steagall's complexity/governability concern? Here, too, Wells Fargo looks like a virtual poster child. In testimony before the U.S. Senate Banking Committee on Tuesday, Wells CEO John Stumpf maintained that the literally 5,000 or more Wells Fargo employees who have been implicated in the phantom account scandal thus far were "acting on their own," beyond the awareness of higher management. That might sound implausible — or, perhaps, irrelevant in view of the high pressure put upon lower-level employees from above to "sell product" — but let us assume for the sake of argument that it is true.

If indeed Stumpf's claim is true, then does this not suggest that a financial conglomerate of Wells Fargo's size and complexity — a size and degree of complexity made possible only by the repeal of Glass-Steagall in 1999 — is simply ungovernable? Does it not suggest, in other words, that institutions like Wells Fargo are not only now too big to fail and too big to jail, but also are too big to manage? It seems to me that Wells Fargo's own CEO is now committed to this proposition. More importantly, I submit, we should now commit ourselves to the same proposition — and reinstate an updated Glass-Steagall regime accordingly.

This piece was corrected on Sept. 22, 2016 at 3:47 p.m. to accurately state the fine levied against Wells Fargo.

Hockett is Edward Cornell Professor of Law at Cornell Law School, senior counsel at Westwood Capital, LLC, and a fellow of the Century Foundation.


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