The House Financial Services Committee will hold three hearings this month on the scandal-ridden bank Wells Fargo. Under Chairwoman Maxine Waters’ leadership, HFSC has been the model committee for highlighting how effective oversight and bracing hearings can put America’s corporate wrongdoers on notice.
But the way our financial regulatory system is constructed means that true accountability for Wells Fargo cannot ultimately flow from the committee hall. Instead, it must come from the cabinet departments and federal agencies which hold the power to prosecute, fine, and regulate our big banks.
This, too, the HFSC has highlighted through its oversight functions. On March 5th, the Committee released an exhaustive 115-page investigative report showing Wells Fargo’s financial regulators were well aware of the bank’s misbehavior for years before the scandal broke, but did not pursue enforcement activity. It is also a damning play-by-play of Wells Fargo’s internal corruption and greed which compelled the resignations of Wells Fargo chairman Elizabeth Duke and board member James Quigley. The report sets a new standard for the oversight needed to build an effective federal government. It is also an indictment of years of recalcitrance within the institutions we trust to protect our financial security.
President Trump’s appointees to the requisite regulators have gone beyond exacerbating this regulatory breakdown. They have actively signaled to Wells Fargo and its peers that no matter how much these financiers break the law and hurt the public, they will never face any punishment meaningful enough to deter future abuses. In fact, on March 3rd, the Consumer Financial Protection Bureau announced an enforcement action against Fifth Third Bancorp for its own crop of fake accounts, in a case disturbingly similar to Wells Fargo.
Indeed, the lack of proper cops on the beat was reinforced even as Chairwoman Waters announced the hearings, when the Department of Justice and Securities and Exchange Commission settled their investigations into Wells Fargo’s fake accounts scandal with a $3 billion fine. Waters pointed out that $3 billion was only half of what Wells Fargo received from the GOP’s 2017 corporate friendly tax bill. “In short, this fine, which is coupled with a deferred prosecution agreement, is the cost of doing business for a bank with $1.9 trillion in assets,” Waters said. “Wells Fargo must be fully accountable to the public for its crimes.”
To accomplish this, Trump’s successor would have to appoint capable, mission-driven, and courageous leaders to the cabinet departments and regulatory agencies with jurisdiction over Wells Fargo. These departments and agencies include:
Federal Reserve Board of Directors:
In 2018, the Fed imposed a cap on Wells Fargo’s asset growth, restricting the bank to its $1.95 trillion as of Dec. 31, 2017. Fed board members thus hold significant leverage over the bank, as they will decide when it has sufficiently changed its behavior to be allowed to grow again. Fed directors should use this to extract meaningful changes to Wells Fargo’s whole corporate culture. This would represent a significant departure from the Fed’s historically gentle approach to Wells: the House report finds that the Fed had an ongoing correspondence with Wells about its improper compliance management since 2013, yet did not take actual enforcement action against the bank until February 2018, five years later. “The Federal Reserve’s reliance on non-public, low severity, supervisory letters allowed Wells Fargo’s risk management systems to languish for five years, during which time consumers were exposed to unchecked opportunities for abuse,” the committee wrote.
Office of the Comptroller of Currency:
The Treasury Department’s Inspector General has been investigating the OCC’s failures to prevent Wells Fargo’s abuses since late 2016. As the nation’s premier bank-focused regulator, charged with handing out or retracting bank charters, the OCC had supervisory jurisdiction over several aspects of Wells Fargo’s operations, including the pay incentives that led to the fake accounts scandal. The House report finds that the OCC, in fact, knew about the Bank’s inattentiveness to consumer and employee complaints as far back as 2009, nearly a decade before the scandal broke. It even knew that employees were gaming the compensation system through aggressive sign-ups as early as 2010.
Yet the OCC refused to pursue enforcement activities or even inform the Wells board of trustees, as it was required to do under OCC guidelines. The OCC also sent letters and made marginal, non-public enforcement actions against Wells’ massive “unfair and deceptive practices” risk, but never took action commensurate with the problem. Trump’s appointee has gone beyond a failure to act and into actively handcuffing his own agency. Among his many deregulatory passions, current Comptroller Joseph Otting has crusaded to neuter the Community Reinvestment Act, which currently restricts Wells from making acquisitions, opening branches, and receiving certain federal government contracts.
Consumer Financial Protection Bureau:
While CFPB Director Kathy Kraninger told progressive Senators that “all options are on the table” for pursuing Wells, her agency’s settlement fines and fees have barely dented Wells’ continuing profitability. Moreover, a political appointee brought in by Kraninger’s predecessor Mick Mulvaney took steps to weaken enforcement, override career staff and convene with the bank through back-channels. According to the House report, CFPB official Eric Blankenstein (who wrote racist blog posts before entering government) told Wells interim CEO Allen Parker that the fake accounts case would be resolved through his Office of Supervision, which would conceal the proceedings from the public and likely mean no more fines. Blankenstein did not inform the Western regional director of the CFPB about his meeting with Parker, even though the Western regional director is in charge of supervising Wells Fargo. Blankenstein resigned in May, but is now a senior counsel in the Department of Housing and Urban Development, where he earns over $166,000 per year.
Department of Justice Civil Division:
The Justice Department’s agreement in February to defer prosecution over the fake accounts scandal means that this minimal $3 billion fee, the so-called “cost of doing business,” is the only punishment the bank is likely to face for 14 years of consumer abuses. This is part of a decades-long trend of permissiveness toward white collar crime from the Justice Department’s Civil Division, and again highlights the perhaps surprising fact that several of the most important economic policymaking positions for a new president to fill are to be found high up within the Department of Justice.
Department of Labor and National Labor Relations Board:
The fake accounts scandal would not have perpetuated or expanded were it not for the much-discussed toxic culture of non-stop pressure within the bank, a culture which remains firmly in place. A coalition of Wells employees called The Committee for Better Banks has even actively raised these labor and cultural issues with Congress. The House report recommends Congress pass a “bank workers’ bill of rights” to protect unionization rights, strengthen whistleblower protections, curb forced arbitration, and more. All of this is necessary and welcome, but the DOL and NLRB must also use their existing powers to protect against hostile cultures like the one at Wells Fargo. Even non-unionized industries, like banking, are entitled to protections against unfair labor practices by the NLRB and DOL. Seeking out complaints and taking action against hostile employers protects not just employees, but consumers, as the Wells Fargo scandals demonstrate.
Securities and Exchange Commission:
As journalist David Dayen explained, the ultimate goal of the fake accounts scandal was to juice Wells Fargo’s sales growth numbers for investors, which it did for years. Head of the Wells retail bank Carrie Tolstedt ignored evidence and lied to both regulators and the company’s board. This is stock fraud. Yet even the paltry $500 million fine the SEC did order against Wells drew pushback from Republican commissioner Hester Peirce, part of her long-running trend of opposing any of the enforcement her agency exists to pursue.
Public Company Accounting Oversight Board:
Though not technically a government entity, this nonprofit corporation is “overseen” by the SEC and plays a crucial role by “auditing the auditors” who check for accounting fraud at massive companies, such as Wells. In 2017, Senators and the press questioned why the PCAOB had not detected graft in Wells’ audits by the firm KPMG. Last year, a host of KPMG partners pled guilty to fraudulently obtaining insider lists of which firms the PCAOB would be auditing. Had the PCAOB been led by committed watchdogs and not engaged in fraudulent relationships with the very firms it oversees, Wells’ misbehavior likely would have been detected much earlier and prevented a great deal of harm.