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The president of the Federal Reserve Bank of New York told the Banking Standards Board in London on Tuesday that he sees quite a few similarities between the Wells Fargo fake account scandal and the subprime mortgage crisis of the late 2000’s.

New York Fed President William Dudley, in a speech entitled “Reforming Culture for the Long Term,” said that the goal-driven sales culture at Wells Fargo, which drove 5,000 of the bank’s former employees to open as many as 2 million accounts without authorization in order to get sales bonuses, reminded him of the environment that led to the mortgage crisis.

“As I have argued before, incentives shape behavior, and behavior drives culture. If you want a culture that will support your long-term business strategy, you need to align incentives with the behaviors that will sustain your business over the long haul,” Dudley said in his speech across the pond.

“Incentives—compensation and promotion, in particular—are powerful tools for communicating the conduct and culture you desire for your firm. Of course, the cultures of firms can and should vary,” Dudley continued. 

“But, the culture of every bank should share a common theme: stewardship—a word that implies professional care, exercised year after year for the benefit of the firm and its stakeholders,” Dudley said. “A commitment to the long term must be at the core of banking. Incentives within a firm should support that goal, not undermine it.”

Dudley then notes that “bad incentives were a key contributing factor in the financial crisis” of the last decade.

“In the United States, the Financial Crisis Inquiry Commission concluded that 'Compensation systems—designed in an environment of cheap money, intense competition, and light regulation—too often rewarded the quick deal, the short-term gain—without proper consideration of long-term consequences,’” Dudley said.  

“This theme applied to all levels of banking organizations,” Dudley continued. “One notable example was mortgage brokers, who were paid based on the volume of loans they generated, not their quality.”

Dudley then draws a parallel between Wells Fargo’s incentive plan, under which bankers’ pay was determined in part by the number of accounts they opened.

“Wells Fargo’s chairman and CEO resigned after regulators uncovered what appeared to be widespread fraud in the retail bank,” Dudley said.

“Compensation, once again, seems to be at the center of a scandal. Neighborhood bankers were paid based on the volume of new accounts opened, apparently with utter disregard for whether customers wanted them or even knew about them,” Dudley continued.

“And, like mortgage brokers in the early 2000s, it appears that job security depended almost exclusively on meeting targets, regardless of how those targets were met,” Dudley added. “There was a serious mismatch between the values Wells Fargo espoused and the incentives that Wells Fargo employed.”

A spokesperson for Wells Fargo said the bank does not plan to respond directly to Dudley’s comments, but provided the following statement on behalf of the bank:

“Wells Fargo is committed to rebuilding trust by making things right with our stakeholders, fixing problems we identify and building a better bank for the future.  We’ve eliminated product sales goals for retail bankers, and introduced a new compensation plan that puts the priority on customer experience, oversight and controls and team goals.  Our new compensation plan puts our customers’ interests first and is an important part of rebuilding trust with all of our stakeholders.”

Dudley notes that investigations into what happened at Wells Fargo are ongoing, adding that he will wait until those investigations are completed to draw “definitive conclusions, but cautions that incentive-based pay schemes can be dangerous if left unchecked.

Dudley also notes that incentives can be used to improve a company’s performance if used smartly.

“Good culture is, in short, a necessary condition for the long-term success of individual firms,” Dudley concludes. “Therefore, members of the industry must be good stewards and should seek to make progress on reforming culture in the near term.”

(h/t CNN Money)

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