How was Wells Fargo caught
The cost of fraud
US President Donald Trump wants less regulation, but more drastic penalties for fraudsters. As is so often the case, his Twitter followers were the first to hear about it. Warren Buffett, among others, will feel the consequences of this project.
If the state wants to reduce crime, it can use two levers: control and education and the level of penalties. The more likely it is that criminal offenses will be discovered or even prevented, the lower the penalty must be in order to deter potential perpetrators.
Control and education, however, are not free of charge. If the state shies away from these expenses and consequently it becomes unlikely to be discovered, only heavy penalties can deter them. If the expected costs of the perpetrator rise, criminal acts are no longer worthwhile. This also applies to financial institutions that plan to defraud each other or their customers.
Higher penalties are cheaper than more regulation
More regulation, i.e. stricter rules and documentation requirements, can make it more difficult for banks to cheat, but they are expensive for regulators and those who are regulated. It would be cheaper to increase the penalties. Even if there are political and moral counter-arguments, high penalties can be justified economically.
US President Donald Trump's policies rarely follow economic theories. The most obvious example is the protectionist “America first” trade policy, which alone benefits a few companies.
All the more astonishing that Trump tweeted in December that he wants to enforce less regulation, but harsher penalties for those caught. It is likely that he is pursuing political motives rather than economic ones.
The Wells Fargo Scandals
Trump's tweet refers to the offenses of the third largest American bank, Wells Fargo. In 2016, the bank still had a good reputation, until it became public that it had opened over three million fee-based bogus accounts on behalf of its customers without their consent. In the meantime, further misconduct has become known.
Page two: Trump's tweet spells bad news for Warren Buffett
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