No bank is “so powerful as to be untouchable.”
In July 2009, the immense State of California, the largest issuer of municipal bonds in the US, began paying its suppliers with fancy-looking interest-bearing IOUs because it had run out of real money.
They weren’t negotiable, and no one could use them to pay employees or suppliers. So Wells Fargo, headquartered in San Francisco, announced it would accept these IOUs from its business customers. It would pay them the principal in full and with some limitations the accrued interest. It took a risk: California’s default was a real possibility.
This is how Wells Fargo bailed out California during the Financial Crisis.
But now the fortunes have turned. The problems keep piling up for Wells Fargo, for its misdeeds committed in California. And the state is awash in moolah; its revenues are heavily influenced by capital gains taxes, and the stock market has been booming for over seven years (this is how the Fed’s asset bubbles bailed out California).
And there’s a special motivation. State Treasurer John Chiang, a Democrat, has recently announced that he’ll run for governor in 2018 when Gov. Jerry Brown gets term-limited out of office. The Wells Fargo fiasco could not have come at a better time.
So Chiang sent a letter to Wells Fargo’s board to explain how he would punish the bank. The letter included this stern admonishment:
But, to borrow from Albert Einstein, “Whoever is careless with the truth in small matters cannot be trusted with [larger] matters.” In the case of Wells Fargo, how can I continue to entrust the public’s money to an organization which has shown such little regard for the legions of Californians who have placed their financial well-being in its care?
With great media fanfare, he held a press conference at noon today in San Francisco and announced the deal to the whole world.
The scandal of the “fraudulent consumer accounts,” as Chiang put it at the press conference, the sales pressures put on employees, and the cross-selling in Southern California first came to light in 2013 when the Los Angeles Times reported on it.
The scandal came to a head on September 8, when Wells Fargo released a surprise statement, admitting that its employees had opened over 2 million fraudulent accounts. It also disclosed that it had settled these allegations for $185 million with federal regulators and the Los Angeles city attorney’s office. It fired 5,300 lower-level employees.
The scandal metastasized, leading to withering hearings in the Senate and the House, a Department of Labor investigation into overtime practices, a slew of shareholder and employee lawsuits, and finally, after intense pressure, compensation clawbacks: $45 million from Stumpf and $19 million from Carrie Tolstedt, the executive who’d supervised the guilty division.
It’s a “legal and ethical outrage that cannot go unpunished,” Chiang said at the press conference, adding:
“Wells Fargo’s fleecing of its customers by opening fraudulent accounts for the purpose of extracting millions in illegal fees demonstrates, at best, a reckless lack of institutional control and, at worst, a culture which actively promotes wanton greed.”
He pointed out that he, the Treasurer, as “the state’s banker,” oversees about $2 trillion in banking transactions per year and manages a $75 billion investment pool. And then there are California’s prodigious borrowing needs – balanced budget requirement, no problem – and these municipal bonds too are sold via broker-dealers, such as Wells Fargo.
So he would go after Wells Fargo’s revenues: for the next 12 months, effective immediately, he’d suspend “Wells Fargo’s participation in its most highly profitable business relationships with the State of California”:
- Suspension of investments by the Treasurer’s Office in all Wells Fargo securities.
- Suspension of the use of Wells Fargo as a broker-dealer for purchasing of investments by his office.
- Suspension of Wells Fargo as a managing underwriter on negotiated sales of California state bonds where the Treasurer appoints the underwriter.
The sanctions will be lifted in 12 months if Wells Fargo mends its ways and complies with the terms of the consent orders it had entered into with federal regulators and Los Angeles City Attorney. If the bank fails to live up to these expectations, “it will face tougher sanctions up to and including complete and permanent severance of all ties between the Treasurer’s Office and Wells Fargo.”
Chiang will also “work with” CalPERS and CalSTRS, the two largest pension funds in the US. Together they hold over $2.3 billion in Wells Fargo shares and bonds. If they throw their weight around, they might be able to effect change.
Among the changes he demanded: separation of the CEO and chair positions – Stumpf holds down both jobs now – review of the banks compensation practices, a whistleblower protection program, and “clawbacks of ill-gotten compensation for executives most directly linked to Wells Fargo’s deceptive and predatory sales practices.”
Chiang had already gone after HSBC in May 2015, by banning a subsidiary “from participating in California’s $6.5 billion deposit program,” after he’d received “reports of money laundering and tax evasion.”
Unfortunately, the occurrences of such fraudulent banking business practices have become far too common. The problems at Wells Fargo and HSBC are not isolated cases but are indicative of a growing breakdown of integrity in the culture of our financial institutions.
Just as Lehman Brothers and Bear Stearns learned the hard way that no bank is truly too big to fail, those banks which survived the Great Recession must now learn that they are not so powerful as to be untouchable.
The Treasurer’s office however did not say how much in fees California paid Wells Fargo last year, and how much it stands to lose over the next 12 months. So it remains to be seen how much of a slap on the wrist this will be.
Wells Fargo acted as an underwriter on the sale of about $738 million of California bonds in 2015, which likely produced “about $4 million” in fees, according to the LA Times. And there were other fees. But in 2015, Wells Fargo booked $90 billion in revenues and $21.5 billion in net income. So the effect of the sanctions might get lost as a rounding error.
But at least, Chiang is making a point at a time when Americans have become exhausted from the serial misdeeds and fraudulent acts perpetrated by too-big-to-jail banks. Oh, which reminds me, no perp-walk yet again!
It’s not like Americans aren’t already struggling with enough problems, without having to look out for with fraudulent bank accounts. Read… “Negative Growth” of Real Wages is Normal for Much of the Workforce, and Getting Worse: New York Fed