By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends much of her time in Asia and is currently working on a book about textile artisans.
Wells Fargo is in the news again, for agreeing last week to pay $500 million to the Consumer Financial Protection Bureau, and $500 million to the Office of the Comptroller of the Currency (OCC), for abuses in its automobile lending and mortgage units. (For the most recent posts by Yves about Wells, see here, here, here, here, and here, specifically concerning the unnecessary auto insurance covered by this settlement).
More fines, more sound and fury, as reported by Bloomberg in Wells Fargo’s $1 Billion Pact Gives U.S. Power to Fire Managers :
The nation’s third-largest bank submitted to an unprecedented order Friday that would give the Office of the Comptroller of the Currency the right to remove some of the lender’s executives or board members. That comes on top of the penalties Wells Fargo will pay to settle U.S. probes into mistreatment of consumers, the largest sanction of a U.S. bank under President Donald Trump.
The OCC said it “reserves the right to take additional supervisory action, including imposing business restrictions and making changes to executive officers or members of the bank’s board of directors.” The agency could also veto potential executive candidates.
…Wells Fargo warned shareholders last week it would soon face a fine of that size, which it will book retroactively in the first quarter. The bank remains under a Federal Reserve penalty that bans growth in total assets.
Yet still no sign of criminal charges, for the bank or its executives, and as for jail time…. I don’t think so.
(See here for OCC’s press release and here for its order).
Context: $1 Billion Fine vs. $3.7 Billion Tax Cuts
Now, some context. As Vox reported on Friday, in a headline that summarises the crux of the matter,Wells Fargo just got fined $1 billion. Republicans cut its taxes by $3.7 billion.. the $1 billion in fines levied by the OCC and the CFFPB is roughly a quarter of the $3.7 billion tax cut the bank received this year.
Pity the Poor Shareholders
So, set against this background, what worries James Stewart of the New York Times most? The headline of his piece tells us where he’s going: Punishing Wells Fargo: Just Deserts, or Beating a Dead Horse?:
But with the new $1 billion penalty, which is expected to be announced as soon as Friday, even I have to wonder: Has Wells Fargo been punished enough?
After all, the bank’s bad management is gone. Whether they’ve paid adequately for their multiple transgressions is an open question — no one has gone to jail, or even faced criminal charges. But Wells Fargo shareholders have been battered, with the company’s stock down about 16 percent this year, while shares of banking rivals like JPMorgan and Bank of America have fared much better, both with slight gains.
Stewart buttresses his point with an expert opinion:
“People did this, not the bank,” said Charles M. Elson, a professor and director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “The behavior was reprehensible and they should have paid the price. But putting the onus on the corporation is a double whammy for shareholders. They were harmed by the actions of management and now they’re paying again.” (As a shareholder himself, Mr. Elson has felt the pain.)
Query: Does Stewart have access to a corporate governance expert who isn’t a Wells shareholder?
Now, while ordinary bank shareholders indeed suffer any time Wells is punished (or do they– more on this below), it also hurts executives who have share-related pay. This I believe includes former bank executives– e.g., the ones responsible for the abuses– because they remain significant shareholders. As Stewart notes:
As for the individuals involved, many have paid a price. At the top, the board fired the former chief executive, John Stumpf, as well as Carrie Tolstedt, who led the community banking division responsible for the fake accounts. The bank clawed back $69 million from Mr. Stumpf and $67 million from Ms. Tolstedt (though both are still enormously wealthy — Mr. Stumpf left with deferred compensation and stock valued at over $130 million, even after the clawbacks. Ms. Tolstedt left with over $124 million before clawbacks).
While laying on additional fines that hurt the share price may not be the most efficient way to punish those executives, it is unfortunately the best we’re likely to see under the system as it stands, not the system as it should be.
I recall the good old days, when George W. Bush was president, and C-suite types from Adelphia, Enron, and WorldCom ended up in the dock. I would like to turn the clock back to those times in this regard, instead of being stuck where we are today. But we all can know the words to the Stones song.
One other point. On whether it’s time to call time on punishing Wells, I note that in December, Trump tweeted otherwise, as reported in another Bloomberg piece,
Wells Fargo Fine Puts Fresh Focus on Power of Trump Tweets:
Frustration with Wells Fargo is bipartisan, as demonstrated by Trump’s December tweet. The president foreshadowed that fines and penalties against the bank could be “substantially increased.” Trump also signaled a warning to the broader financial industry that there might be more to come: he pledged to dial back regulations, but made clear that punishments would be severe for firms “caught cheating.” The statement followed a news article questioning whether the Consumer Financial Protection Bureau’s new leadership, picked by Trump, would drop an investigation into Wells Fargo.
Back to the ordinary shareholders. What did they think of the latest settlement? According to Bloomberg in Wells Fargo’s $1 Billion Pact Gives U.S. Power to Fire Managers :
Still, investors appeared relieved at the announcement, as shares advanced 1.8 percent to $52.44 at 11:10 a.m. in New York, the best performer in the 24-company KBW Bank Index. The settlement should remove one overhang from the shares, especially since the penalty isn’t as bad as some analysts had anticipated, Erika Najarian, an analyst at Bank of America Corp., wrote in a note.
More window dressing.
Not only is it astonishing that no individuals are facing legal responsibility, but also I’m having trouble seeing how Wells Fargo is even allowed to retain a banking license in any U.S. state. If deliberately conspiring to avoid the money laundering rules imposed in connection with Iran can threaten Standard Chartered’s New York license, I cannot think of a reason why Wells Fargo should not have its licenses revoked by the relevant state regulators.
It’s simple: there is no public interest in having a bank that behaves as this firm has done.
What you say makes sense if you think of the US as an entity run for the benefit of its citizens and consumers. If you think of it as run for the benefit of its C suite managers and billionaires it makes no sense at all.
Which one do you think it is?
Crime Pays. Execs and the 1% walk. Permanent Monopoly “Get Out of Jail Free” card for banksters. Cost of doing business, line item #47b, just pass the costs through to the
victimscustomers. The rest is tax-deductible.
USA = The Hunger Games, may the odds always be in your favor. But where’s our Katness Everdeen?
Pursuant to 12 U.S.C. 93(d), if a national bank violates certain anti-money laundering statutes under Titles 18 and 31, the OCC may, or, in certain cases, must, hold a hearing on whether to terminate the bank’s charter.
There is no equivalent statute addressing Wells Fargo’s misconduct, egregious as it was.
I guess WF’s laundering money for the drug cartels isn’t part of Titles 18 and 31…
Can the shareholders recover their losses from the Executives and Board?
Legally speaking, a shareholder’s “relief” for mismanagement by executives and/or the board is the shareholder derivative lawsuit. One or more shareholders, acting on behalf of the corporation, sue the bad actors, seeking damages to compensate the corporation for the harm it suffered as a result of the bad action. (This is why it’s a “derivative” action–on its face, the suit’s plaintiff is the corporation, but it’s really a group of shareholders that drives the suit.)
But, the end result of a successful derivative action is that the corporation recoups at least some of the losses due to the bad executives or directors. This result can indirectly benefit shareholders. (Though the more cynical will argue that it really benefits the lawyers more–and I can’t say that isn’t right.)
There are various procedural requirements before you can even bring a shareholder derivative suit, and also various substantive complications (e.g., for normal, legal business decisions, even incredibly stupid ones that all but destroy the firm, the “business judgement rule” shields management from liability).
EDIT: I also meant to say, and forgot originally, that for large corporations management and the board often have insurance for derivative suits, with the premiums paid by the corporation.
You mean to tell me that the regulator meets with the horrid bank called Wells Fargo and they have a chat and WF “agree…to pay $500 million.” Next you will have criminals agreeing to their time in prison so as not to disrupt their lifestyle. Wow, just Wow!
Why in this world of ours would anyone deal with such an institution? And who would want to be a shareholder? Such chaos!
“Best way to rob a bank is to own one.”
William K. Black
Nitpick: reading the article it looks like no fine was imposed and that there was a negotiated agreement instead. “Impose” I think means that they don’t agree and you use enforcement powers to do it anyway without their consent. So if they agreed, then it wasn’t imposed.
We’re in a situation where nothing ever gets imposed on these banks because of their misbehaviour. As long as they keep getting deals that they find acceptable enough to agree to, they will keep misbehaving. They need to start getting hit with penalties that they find unacceptable but tough shit.
Sending them to jail would be a good place to start. I would even say that a jail sentence that results from a plea bargain isn’t imposed though. The sentences have to be tough enough that they decline plea bargaining and take their chances with a criminal trial.
Heck, maybe it doesn’t even count if they report for sentencing. It has to be bad enough that they’re dragged to their cells kicking and screaming.
These fines are pretty much always embedded in settlement agreements. Given how bad the fact set is at Wells, far more so than in most cases, they would not want the regulators suing and making all the bad stuff in their files a matter of record in discovery (it’s over my pay grade, but suing might even allow the regulators to expose a lot of what is normally considered to be “confidential regulatory information, ” so they might not even have to do the digital equivalent of root in Wells’ file cabinets all that much).
The fact that the OCC reserves the right to fire Wells execs and board members says this settlement was more imposed than negotiated. This is a statement that they have and continue to have leverage.
There’s a video of Elizabeth Warren trying to get some agency doofus to answer when the last time was that the agency actually tried an offender in court instead of settling. Part of what she was after was discovery. The doofus kept dodging and squirming.
I’m trying to find the vids, not finding the exact one I remember but these two are kind of the idea:
There’s one I remember where she says doing discovery and exposing dirty laundry is a specific reason to take more cases to trial. It’s hard to find stuff on youtube though.
Anyway this stuff was encouraging 4 years ago, though in retrospect it now looks more like she was grandstanding.
Warren can ‘t make regulators do anything. All she has is a bully pulpit to try to embarrass them into upping their game.
One of the normal logical parties to go after miscreants, the SEC, is hamstrung by Congress with inadequate budgets (the SEC turns over way more in fees and fines than it gets to spend). And they have been subjected to explicit threats to have their budgets cut further if they go after anything more serious than parking tickets, um, insider trading.
The Fed and OCC aren’t subject to Congressional approval for their budgets, so they don’t have these excuses. But we know the Fed is super duper captured, and historically, the OCC has been even more bank friendly. So for the OCC to man up even this much is noteworthy, but you could also interpret it as indicating that what has not yet come public re Wells is much stinkier than what we’ve seen already.
It will be interesting to see how long the public puts up with this before we get some guys who have been stepped on their whole lives and like Netflix too much decide to even things out a bit since the rule of law only applies to the poors.
I won’t be the guy, but I also won’t be surprised.
Wells Fargo needs a middle name like Terry or Tom, because then the intials are so much more appropriate…
For quite some time now I just refer to it as What The Fargo bank. And I was never even a customer.
If corporations ‘are people’ and can write off their fines against income, then can some public interest lawyer please file a class action lawsuit so that citizens can write off their traffic or other fines against income?
“Equal representation before the law”, no?
Jeri Lynn wrote:
” recall the good old days, when George W. Bush was president, and C-suite types from Adelphia, Enron, and WorldCom ended up in the dock. ”
But recall how many cases were not prosecuted because the SEC files were kept in Building 7 that went down on 9/11, what a coinkydink?
You’re quite right here. I don’t think that either James Stewart of the New York Times or Professor Charles M. Elson have really thought through their argument that the penalties are unfair to the corporations. Either corporations are people, as they have so long argued, in which case the fines are fair, or else it is time to put the people responsible into orange suits. One or the other.
Oh these banksters have got a get-out-free card whatever they do. Basically they can screw the customers in any which way, pay pennies on the dollar made and get the customers arranged in a new position. Heard of sitting ducks?
You rob a person walking on the street. You get jail term. But the banksters can rob at will… it is their business.
Good way to make America great again. Just allow thieves to run the country.
Some rob you with a gun.
Others with a fountain pen.
Our local paper had two articles in it’s Sunday edition –
One article details the efforts of a resident of the jail to cause serious bodily harm via a letter bomb. And the efforts of the FBI assigning a multitude of agents to watch the conspirators using a variety of methods including aerial surveillance. Apparently some 20 to 40 agents were involved in the effort.
The second article details the fines of Wells Fargo.
And the bank is described in tones of sweetness and light. We know that the bank conspired to defraud depositors and customers in part to boost the stock “value”. The bank used wire and mail fraud in this successful conspiracy. The article makes no mention of any efforts by federal law enforcement.
So one has to wonder ?
Is Federal Law enforcement engaged in discriminatory prosecutions ?
Can’t recall, do/did Wells Fargo customers get restitution or compenstion for damages? IIRC, not only did customers get dinged for unnecessary fees but some had their credit ratings damaged due to overdrafts and unpaid fees, sometimes in accounts they didn’t know they had.
Yeah, well at least this money won’t go into an Obama,Holter,lynch leftest slush fund for leftist groups like moveon ect….We been taking it for so long …..
Jeff Sessions has redirected the money to the treasury where we all assumed it was going to help pay down the debts ect…
Stepping back, I’m curious — where do fines like this, if they do get collected, go?
We never hear in the news what the fine money is used for. Pay down the debt? Fund the regulators? Give it to the victims? A part of me thinks maybe the Feds just shred it to reduce the money supply.
I wonder why most of Wells Fargos customers didn’t close their accounts and move to another bank, and stockholders and pension funds divest their WF stock. Wouldn’t that be punishment enough?