Wells Fargo has one heck of a scandal on its hands

Wells Fargo CEO John Stumpf endured a nearly three-hour questioning from the US Senate Banking Committee on Tuesday.

Stumpf was constantly took to task by Senators, both Democratic and Republican alike, for the scandal in which Wells Fargo employees opened roughly 2 million checking and credit accounts without customers' knowledge.

During the financial crisis Wells Fargo was generally thought of as the bank that got off looking the cleanest.

The bank had few bad loans, as it managed to maintain comparatively strong lending standards that kept it out of the worst of the crisis and allowed it to acquire troubled Wachovia.

In 2016, however, Wells Fargo and CEO John Stumpf find themselves in the middle of the perfect storm of Wall Street scandals. After Tuesday's Senate hearing, it has become clear that with an easy to understand issue, a political firestorm, and missteps by the bank that exemplify American's worst notions of Wall Street, everything that could go wrong for Wells Fargo did.

It's an easy to understand scandal

Since the financial crisis, which focused America's microscope squarely on Wall Street, there have been a number of scandals, but Wells Fargo's is different. For Wells, the transgressions are simple and its an easy line for Americans to draw directly to their own financial situation.

For instance, it may be hard for people without a reasonably intimate knowledge of the financial system to understand JPMorgan's so-called "London Whale" trading scandal in 2012 or the Barclays Libor rigging scandal in 2014. Even the most popular explainer of the financial crisis in recent years - The Big Short - had to employ non sequiturs with celebrities explaining ideas like mortgage-backed securities and credit default swaps to communicate how it happened.

On the other hand, Wells Fargo's scandal deals with checking accounts and credit cards, financial instruments that nearly every American has.When people understand how the scandal impacts them it makes them more less likely to ignore the problem.

Millions of people in the US have had to get a credit check for a mortgage, so when Senators suggest that Wells Fargo employees opening and closing a credit card without a customers knowledge may impact a credit score and lead to a higher interest rate, it is simple to understand the direct ramification.

It's a Main Street scandal with a Wall Street face.

Caught in the middle of politics

Not only is the Wells Fargo scandal easy to grasp for the average American, but it's a slam dunk issue for politicians as well.

In an election season marked by increasing partisanship, it was certainly an odd sight to see Senators from both sides of the aisle agreeing with colleagues from the other party and attacking Stumpf relentlessly.

Democrats like Elizabeth Warren, who called for Stumpf to be criminally investigated, and Republicans like Richard Shelby, who said that the bank has seriously broken the public's trust, both seemed to be in agreement (to varying degrees) that there was significant wrongdoing at Wells.

Senators also spent significant portions of their time reading letter from constituents about the impact of the scandal on their own lives, which not only looks bad for Stumpf and Wells Fargo, but also allows the politicians an easy opportunity to prove that they are working for the people that elect them.

So you've got an easy case for politicians from both parties to look tough, bipartisan, and work for their constituents. Given all of these dynamics, it's simple to see why Stumpf was so thoroughly racked through the coals.

A tough tightrope

Stumpf also has a difficult task laid out before him to show that he is accountable without bearing the brunt of the blame.

Essentially, Stumpf's argument is that he accepts responsibility for the scandal, but that there was not a culture created by senior executives that encouraged the type of behavior that led to 2 million false accounts being opened.

Part of Wells Fargo's success over the years has been its ability to get existing customers to sign up for new products, a practice called cross selling. Stumpf has long lauded cross selling as a reason that the bank had been so successful (as Warren brutally pointed out by reading transcripts of earnings calls in which Stumpf himself touted the tactic).

Included in this cross selling, however, were incentives for lower-level employees to sign people up for new products. Throughout the hearings, Senators described a "pressure cooker" environment in which employees were forced to meet sales targets or face discipline. Stumpf has said that the culture was not to blame and employees were not pushed to oversell, but the bank also suspended these incentives for employees following the $185 million settlement with regulators.

It's a tough line to walk, especially while testifying for hours at a time, and Stumpf certainly stumbled a few times saying that the actions weren't "random." It also opened up Stumpf to tough lines of attacks from Senators that he was laying the blame on struggling employees who were trying to make aggressive sales targets to get by.

Thus, Stumpf has to defend the bank's overall culture while explaining how over 5,000 employees violated that culture over a multi-year period.

By having to accept responsibility while also not implicating himself directly, Stumpf has created a nearly impossible situation for himself.

An easy target

Finally, Wells and Stumpf have to defend the entire pay structure of Wall Street. Carrie Tolstedt, the head of the community banking division, was the executive directly responsible for overseeing the retail banking sector of the company where the fake accounts were created.

In July, Tolstedt retired from Wells Fargo, holding roughly $96.6 million in various stock awards. Numerous times during the testimony on Tuesday, Stumpf was asked why Tolstedt wasn't fired and whether or not the bank would use its clawback provision to take back some of that compensation.

Now to be fair, stock-based compensation isn't new and it's used in industries from banking to tech to media, so it's not as if the way Tolstedt was paid is out of the ordinary. Additionally, the level of compensation is in line with the ordinary for a senior banking executive.

But in an environment in which income inequality is an increasingly important issue, and when Stumpf talks about the 5,300 employees that were fired from "good paying jobs" were making $37,000 to $60,000 a year, the size of Tolstedt's compensation raises eyebrows.

It looks terrible for the bank, and as Warren said it appears to her like "a giant bank cheats the little guys and the executives line their own pockets." Even if the stock-based compensation is a standard for many industries, the compensation is a public relations nightmare and another headache for a bank that already has plenty of them.

So you've got an easy to understand scandal that directly impacted hundred of thousands of Americans, a slam dunk political target in an election season, and a poster child for frustration over Wall Street's pay.

Well Fargo has one heck of a scandal on its hands.