Capitalism At Its Worst: Wells Fargo's Subprime Mortgage Machine

The Washington Post has a long story today that offers a horrifying glimpse into how one of America's largest banks systematically stripped wealth from the some of the poorest people in the nation. It details the sordid career success of a former star subprime loan officer at Wells Fargo:

For nearly a decade, Beth Jacobson lived inside the vast machinery of subprime mortgages that shook the nation’s economy.

In sworn court testimony, she described watching loan officers comb through heavily African American areas such as Baltimore and Prince George’s County, forging relationships with churches and community groups to sell their members shoddy mortgages. She says she processed loans for homeowners with sterling credit ratings with higher interest rates than they needed to pay. And she says she pumped out millions of dollars in mortgages to people with no paperwork and low incomes, becoming Wells Fargo’s top-producing loan officer.

Of course, none of this is all that surprising. We have heard some version of this same story before: how banks incentivized their loan officers to push people into mortgages that were terrible for the homeowners but great for the bank. The higher the interest rate that loan officers could secure, the bigger their commission. How sick is that? It's the exact reverse of how the system should work, which is banks trying to help consumers find the best loan product they can.

The perversity of this practice is a reminder of how capitalism can produce ruthlessly immoral outcomes. In theory, there is nothing wrong with subprime lending, in that it allows people with poor credit to get access to capital and build personal wealth. But the abuses around such lending show how easily bad behavior can emerge when there is a lot of money to be made easily.

What is striking about Beth Jacobson is how absolutely ordinary she seems. Yet she was drawn into a world where exploiting low- and middle-income households was a standard business practice. She not only went along, but excelled at it.

Such is the nature of financial incentives: They can easily pervert people's ethics. And such is the nature of corporate culture that grossly unethical practices can become totally normalized, so that nobody is raising serious questions.

Notable, too, is the way that most of this wrongdoing will not be punished, given the power of Wells Fargo and the banks generally. The bank is working assiduously to deny Jacobson's allegations and discredit her. It will be very surprising if any Wells Fargo executive are ever held personally responsible for the illegal actions that Jacobson details.

Which increases the odds that the abuses we saw during the subprime bubble will happen again.