Banking / Corporate Behavior
Banking Regulations

The Finance 202: Wells Fargo mess may make it harder to roll back Dodd-Frank

Burgess COMMENTARY
US ... and Western ... corporate culture is dominated by the idea that performance is almost exclusively about profit. The idea that profit should be balanced by good social and environmental behavior and an adherence to some core concepts of ethics and morality is almost totally absent. This culture and mondset has resulted in huge increases in investor wealth over the past 50 years, but at a huge cost to society and the environment. This is a sad state of affairs ... and also very dangerous because the resulting socio-enviro-economic system is unstable and unsustainable. I think that it is fair to say that many of the major waves of innovation in the history of capitalism were driven by business investment that was both profitable and delivered significant improvements to society ... railroads, steamships and automobiles come to mind, as well as all sorts of innovations in manufacturing including mass production and innovations in agriculture. People got better lives as a result of investment in industry, agriculture and infrastructure ... but much changed about 50 years ago when financial engineering started to take precedent over real engineering and investment.
Peter Burgess

The Finance 202: Wells Fargo mess may make it harder to roll back Dodd-Frank


A Wells Fargo Bank in Charlotte, North Carolina. U.S. (Reuters/Mike Blake)

Wells Fargo can’t seem to find the bottom of its scandals. That’s becoming bad news for the entire banking industry.

The fake-account mess that originally landed the bank in hot water turns a year old in September and still isn’t resolved. It’s since been joined by a slew of other revelations and accusations. The bank charged more than 800,000 people for auto insurance they didn’t need. It slapped veterans with hidden fees to refinance their mortgages. A group of young immigrants are suing over allegations Wells Fargo denied them student loans and credit cards — a suit Wells tried to have tossed but a federal judge greenlit on Thursday. In a regulatory filing on Friday, the bank signaled it could soon have still more headaches to disclose. And on Monday came the news it's facing regulatory scrutiny from the Federal Reserve Bank of San Francisco for not refunding insurance money to people who paid off car loans early.

News of the first auto loans controversy alone prompted fresh calls for hearings into the bank’s practices from congressional Democrats on both sides of the Capitol last week — and one Senate Republican, Jerry Moran of Kansas. All the Democrats on the Senate Banking panel signed on to a request to Sen. Mike Crapo (R-Idaho), who chairs the committee, for a September hearing with Wells CEO Timothy Sloan and board chairman Stephen Sanger. And Sen. Elizabeth Warren (D-Mass.) renewed her request of Federal Reserve Chairwoman Janet L. Yellen that the central bank use its authority to fire directors who served during the fake-account scandal.

The cascade of controversies has marred the bank’s once-sterling brand. Wells now ranks as the least-respected company in America, behind even Big Tobacco, according to a June survey of money managers conducted by Barron’s. And it’s share price has suffered, too, lagging further behind its peers than at any time since 2011. Bloomberg’s Kartikay Mehrotra, Laura Keller, and Margaret Cronin Fisk have a good rundown of the bank’s no-good, very bad year. For the rest of the sector, here’s their key insight:

Don’t banks get in trouble all the time?

U.S. banks have paid huge sums to settle all sorts of allegations related to market-rigging and investor-fleecing, many involving mortgage-backed securities. But those settlements are almost always related to wholesale banking, as opposed to retail. Wells Fargo’s current scandals are different because they deal with customers in the consumer division. That’s more unusual, and a more politically sensitive problem.


Sen. Elizabeth Warren (D-Mass.). (Melina Mara/Washington Post)

Although Wall Street is a favorite punching bag of both parties — see the 2016 election — refining campaign-trail animus into relatively inscrutable banking regulation is another matter. So less than a decade after a financial crisis that almost destroyed the economy, the debate over banking rules in Washington these days centers on how much relief to provide the industry from the Dodd-Frank law passed in its wake. That's left Democrats who'd like to impose new restrictions on the biggest financial institutions struggling instead simply to hold the line by defending the rules already on the books.

The Wells Fargo mess, however, put industry overreach in terms everyday consumers understand. Democratic lawmakers and their allies backing tougher oversight are taking heed. They're marshaling the example of the Wells Fargo imbroglio to try to protect a new Consumer Financial Protection Bureau rule making it easier for consumers to sue their banks. House Republicans already voted to strip that rule, and their Senate counterparts will attempt to follow suit next month. Backers of the so-called arbitration rule argue Wells Fargo customers could have brought the bank's issues to light sooner if they hadn't been forced into contracts that barred them from challenging the bank in court.

It's not hard to imagine industry critics making even more hay out of the bank's malfeasance. As Cap Alpha's Ian Katz wrote late last month, the nesting Wells scandals could 'end up being unhelpful to broader efforts to reform Dodd-Frank, because it strengthens the arguments of Democratic lawmakers including Elizabeth Warren and Sherrod Brown that banks need tougher, not lighter, oversight.'

'Sure,' Katz continued, 'one could argue that Dodd-Frank didn’t prevent Wells Fargo’s sales practices scandal or this auto loans mess. So what good is it? But for the average bloke, that doesn’t translate into a reason for weakening oversight of banks.'