Business Report: Why giant financial firms make giant mistakes - Hawaii News Now - KGMB and KHNL

Business Report: Why giant financial firms make giant mistakes

(Image: Hawaii News Now) (Image: Hawaii News Now)
HONOLULU (HawaiiNewsNow) -

Wells Fargo is firing 5,000 employees for creating credit card accounts and bank accounts for thousands of customers who didn’t ask for them and didn’t know the accounts existed. Why did the employees do this?  To meet their sales targets and get bonuses. Wells Fargo created a financial incentive to play fast and loose with its own customers without setting up a mechanism to catch wrongdoing. Essentially the big bank made the same mistake you make, trusting people who work for big banks. If it sounds familiar, this is what happened when the world of finance broke the economy in 2008.

Countrywide Financial and its rivals hard-sold mortgages to people were couldn’t afford them. The pitch was, if you can’t afford the higher payments when they kick in later, just sell the house for a profit. This was delusional thinking, an assumption that prices never stop rising. Then Wall Street firms bundled all those doomed mortgages and resold them, pretending they were safe.

They covered themselves by purchasing insurance against losses from AIG, whose insurance salesmen  told themselves if there WAS trouble it would be AIG – “after I’m gone.” In all these cases, high-paid salesmen behaved like salesmen, not bankers, deluding themselves and their customers to get big bonuses.

The lesson here is, when you incentivize people to sell more, you raise the risk they’ll do something that’s not in the best interest of the customer OR the employer. If you must incentivize, you need also to monitor the results. There’s also a lesson for regulators: if you give them a slap on the wrist, they might do it again. 

Copyright 2016.  Hawaii News Now.  All Rights Reserved.

Powered by Frankly