The solution to poisonous banks is a non-toxic public bank

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What's too good to be true is generally too good to be true. So it was with Wells Fargo, which last year displaced China's Industrial and Commercial Bank as the world's most valuable bank. With a market value of about $300-billion (U.S.), the San Francisco bank was worth a lot more than mighty JPMorgan Chase, a lot more than Citigroup.

How did Wells Fargo chief executive officer John Stumpf do it? Surely, he had found the magic formula that had eluded almost every other bank on the planet. Even Warren Buffett, with a 10-per-cent stake in Wells Fargo, had become a true believer. As it turned out, old-fashioned deceit was part of the equation.

In a cross-selling frenzy, bank employees opened as many as two million phony chequing and credit accounts without the customers' knowledge. For its sins, the bank has fired the 5,300 employees who were allegedly behind the scam, paid a $185-million (U.S.) fine to regulators and seen its shares sink (much to the delight of JPMorgan, which is back atop the value heap). Mr. Stumpf himself gave bumbling and strained testimony on Tuesday before the U.S. Senate banking committee and may lose his job; he should.

For bank customers everywhere, Wells Fargo is yet another example of the ever-reliable bank industry fiasco. The scandals have included everything from rigging foreign exchange rates and failure to enforce money-laundering rules to facilitating tax evasion and allowing clients to buy toxic securities. Since the 2008 financial crisis, the world's top banks have paid about $300-billion (U.S.) in fines for their bad behaviour and more is to come.

Combine the banks' endless sleaze with the risk they pose to the economy and to taxpayers when they get into trouble and you have a powerful argument for publicly owned banks that could be regulated and operated like utilities, with an employee incentive system that does not railroad customers into buying expensive products they don't need. There is a reason that some civilized countries keep their public postal banks intact. Italy's BancoPosta, set up 1875, is today the country's 10th-largest bank and could get bigger as faith in the banking system evaporates.

Wells Fargo was supposed to be the clean, safe bank, the one that bucked the trend to keep its customers and shareholders happy. As banks searching for new income streams, quick profits and size for the sake of size raced off into investment banking, derivatives trading and esoteric products such as mortgage-backed collateralized debt obligations, the California lender kept it simple. It concentrated on retail banking, including credit cards, mortgages, savings and retirement accounts, small-business loans and insurance.

The formula worked. As other banks blew their brains out on bad trades and incomprehensible products that would play star roles in the financial crisis, Wells Fargo chugged ahead, becoming a regulator's dream. But it pushed too far on the retail front, becoming the "king of the cross-sell," to use Mr. Stumpf's own words. The internal mantra became "eight is great," meaning that bank employees were encouraged to sell eight products and services to customers, regardless of their need for them. When customers resisted, the bank apparently set up phony accounts in their name.

Why Wells Fargo went for such sordid behaviour is not known, though it probably realized at some point that its status as the top player in the U.S. mortgage market, and the puffed-up California market, was as much liability as asset. If real estate were to fall into the tank again, the bank would be in serious trouble, so it juiced up the fee-income side to, apparently, great success. How Mr. Stumpf failed to detect that 5,300 of his own employees were scamming Wells Fargo's customers is a mystery. He has been CEO since 2007; the phony-account scandal started after he took the job.

Wells Fargo has lost its saintly halo among regulators, lawmakers, customers and shareholders at alarming speed. The cleanup won't end with the firing of thousands of fairly low-level employees. The management rot that allowed the fake accounts to flourish will have to be eliminated too.

By now, eight years after the start of the financial crisis, bank customers are weary of the non-stop scandals and the kid-glove treatment of the executives responsible for them (Carrie Tolstedt, the Wells Fargo executive who oversaw the bank division responsible for the phony accounts, left in July with her $125-million (U.S.) pay package intact).

To stop the greed-fest, why not nationalize the banks?

It's a tempting idea, though an impractical one, in good part because it would be impossible to unwind the trillions of dollars in notional value of all the derivatives held by the banks. But creating big public banks would give customers the option of avoiding the sleaze-fest. These banks could be called postal banks (as they are in parts of Europe), invest only in safe government bonds and do what banks are supposed to do, which is to transform deposits into loans that would grease the real economy and create jobs. They would avoid investment banking, trading and derivatives and their employees would not be given aggressive, Wells Fargo-style sales targets.

If the financial crisis and the ongoing scandals have proved anything, it's that regulators cannot regulate private banks to the point they are safe and honest, and that too much regulation, perversely, can backfire by tricking bank customers into thinking that their bank is bulletproof. A simple, low-risk public bank that offers simple, low-risk banking and insurance products is an old idea whose time has come again.