Wells Fargo Getting Clocked by California: What, No Perp-Walk?
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 Timesreported 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.”