At Wells Fargo, you know, there were three very significant mistakes, but there was one that dwarfs all of the others. You're going to have incentive systems at any business, almost any business. There's nothing wrong with incentive systems, but you got to be very careful what you incentivize, and you can incentivize bad behavior, and if so, you better have a system for recognizing it.
Clearly at Wells Fargo, there was an incentive system built around the idea of cross-selling and number of services per customer, and the company in every quarterly investor presentation highlighted how many services per customer. So it was the focus of the organization, a major focus, and undoubtedly people got paid and graded and promoted based on that number, at least partly based on that number. Well, it turned out that that was incentivizing the wrong kind of behavior. We've made similar mistakes. I mean, any company's going to make some mistakes in designing a system.
But it's a mistake, and you're going to find out about it at some point. And I'll get to how we find out about it. But the biggest mistake was that, and I don't know, obviously I don't know the facts as to how the information got passed up the line at Wells Fargo, but at some point, if there's a major problem, the CEO will get wind of it, and that is at that moment that's the key to everything because the CEO has to act.
That Solomon's situation that you saw happened because on April, I think 28th, the CEO of Solomon, the president of Solomon, the general counsel of Solomon sat in a room and they had described to them by a fellow named John Merryweather some bad practice, terrible practice that was being conducted by a fellow named Paul Moer who worked for him. And Paul Moer was flimflamming the United States Treasury, which is a very dumb thing to do. And he was doing it partly out of spite because he didn't like the Treasury and they didn't like him. So he put in phony bids for US treasuries and all of that.
So on April 28th roughly, the CEO and all these people knew that they had something that had gone very wrong and they had to report it to the Federal Reserve Board of New York, the Federal Reserve Bank of New York. And the CEO, John, good friend, said he would do it and then he didn't do it and he undoubtedly put it off just because it was an unpleasant thing to do. And then on May 15th, another Treasury auction was held and Paul Moer put in a bunch of phony bids again. And at this point, it's all over because the top management had no one ahead of time. And now a guy that was a pyromaniac had gone out and lit another fire and he lit it after they'd been warned that he was a pyromaniac essentially. And it all went downhill from there.
It had to stop when the CEO learns about it. And then they made a third mistake actually, but again it pales in comparison to the second mistake. They made a third mistake when they totally underestimated the impact of what they had done once it became uncovered because there was a penalty of 185 million and in the banking business people get fined billions and billions of dollars for mortgage practices and all kinds of things. The total fines against the big banks, I don't know whether it totals 30 or 40 billion or whatever the number may be. So they measured the seriousness of the problem by the dimensions of the fine and they thought a $185 million fine signaled a less offensive practice than something involved 2 billion and they were totally wrong on that. But the main problem was they didn't act when they learned about it. It was bad enough having a bad system but they didn't act.
At Berkshire, we have the main source of information for me about anything that's being done wrong at a subsidiary is the hotline. Now, we get 4,000 or so hotline reports, or we get communications on the hotline perhaps 4,000 times a year and most of them are frivolous. You know, the guy next to me has bad breath or something like that. I mean it's a... but there are a few serious ones and the head of our internal audit, Becky Amick, looks at all those. A lot of them come in anonymous, probably most of them, and some of them she refers back to the companies, probably most of them, and but anything that looks serious, you know, I will hear about and that has led to action.
We'll put them more than once. And we spent real money investigating some of those. We put special investigators sometimes on them. And like I say, it has uncovered certain practices that we would not at all condone at the parent company. I think it's a good system. I don't think it's perfect. I don't know what... I'm sure they've got an internal audit at Wells Fargo and I'm sure they've got a hotline and I don't know the facts, but I would just have to bet that a lot of communications came in on that. And I don't know what their system was for getting them to the right person. And I don't know who did what at any given time, but that was a huge, huge, huge error if they were getting... and I'm sure they were getting some communications and they ignored them or they just sent them back down to somebody down below.
Charlie, you followed. What are your thoughts on it?
