Elizabeth Warren Wants To Break Up Wells Fargo, And She's Not Wrong!
Earlier this week, Sen. Elizabeth Warren sent a letter to Jerome Powell, chairman of the Federal Reserve, urging him to break up Wells Fargo — that is, take away their ability to do both consumer and investment banking — due to the many problems the bank has had over the last several years. Predictably, this was met with cheers, shrugs, and "fine, but it'll never happen"s. Investors aren't too worried, as the stock has actually gone up over the past several days.
It kind of says a lot about the US that a senator writes a letter detailing two decades worth of consumer scandals a company has found itself mired in, six of which occurred in the last four years, and demanding they be broken up, and the bank's stock actually rises. People have absolutely no belief that these institutions will ever be forced to face consequences for their actions, and, sadly, they're not too misguided.
That being said, Warren makes a hell of a lot of good points — number one being that no consequence so far has forced them to get their act together or remunerate consumers for the myriad ways they had screwed them over the years. This has included such hits as: forcing 800,000 car loan customers to get auto insurance they didn't need, which then led to Wells Fargo repossessing their cars when they couldn't pay; screwing up all of the refunds they were supposed to pay customers for having done that; falsifying clients signatures and other documents; closing customer accounts and then charging them overdraft fees; and recommending investment products to their retail customers without "without having adequate compliance policies and procedures and without providing financial advisors proper training and supervision" for them.
This matter is of urgent importance. Earlier this year, media outlets reported that Wells Fargo is actively working to expand its investment bank, despite the firm's asset cap. Wells Fargo executives are seeking to compete with other giant Wall Street banks by, among other things, "lending to hedge funds looking to ramp up bets"—the same activity that triggered $10 billion in losses among megabanks earlier this year. Given Wells Fargo's woefully inadequate internal controls, the firm cannot be trusted to conduct such risky activities in a safe and sound manner. In addition, I am concerned that Wells Fargo's senior executives are focused on expanding risky investment banking activities instead of remediating consumer harms and improving lax internal controls. The Fed should immediately revoke Wells Fargo's FHC [financial holding company] status to ensure that its leaders focus all of their attention on fixing the bank's numerous, chronic risk-management deficiencies.
Having both a retail banking division and an investment division is not easy to handle without putting consumers at risk, which is why for most of the last century, the Glass-Steagall Act prevented banks from engaging in both consumer banking and investment banking. The law was enacted in the 1930s after the Great Depression, to ensure that consumers didn't get screwed by banks taking the kind of big risks they would if they were focused on investment banking. The kind of risks Wells Fargo is now taking, and which Warren believes are harming customers.
But in 1999, inspired by Citigroup's desire to become a massive conglomerate in spite of Glass-Steagall regulations, three Republicans teamed up and passed the Gramm–Leach–Bliley Act, which effectively eliminated everything in Glass-Steagall that protected consumers.
Here's a little clip I always enjoy of the late John Dingell — a Senator, not a psychic — saying, in 1999, that this could potentially lead to banks becoming ... too big to fail.
While this means that banks now can do both consumer and investment banking, they're supposed to (ideally) have to adhere to certain standards in order to be able to do so. As Warren explains in her letter ... Wells Fargo has not.
Under the Bank Holding Company Act, financial holding companies (FHCs) like Wells Fargo are required to be "well capitalized" and "well managed." When an FHC or one of its depository subsidiaries fails to meet these requirements, the Fed is required to provide notice to the FHC and give the institution on opportunity to correct its deficiencies. If the holding company fails to correct its deficiencies within 180 days, the Fed may require the FHC to "divest control of any subsidiary depository institution," or, if the FHC instead chooses, "to cease to engage in any activity" that is not permissible for a bank holding company. This Fed authority ensures that the size and complexity of a company does not interfere with its ability to provide safe, fair, and transparent core banking services to its customers.
In order to remain "well managed," an FHC must earn at least satisfactory scores on its CAMELS (Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity) composite and management ratings used by banking supervisors. These scores are confidential. But past reporting has indicated that Wells Fargo's CAMELS rating was downgraded in 2017, and it is inconceivable that Wells Fargo could have earned an upgraded CAMELS score given the sheer number and ongoing nature of scandalous and unlawful behavior at the bank since then.
In an appearance on MSNBC on Wednesday, Warren briefly addressed the letter, saying, "My question is, if you're not going to break up Wells Fargo this time, tell me when you are?" Which, really, is the whole question. How many times does a bank have to screw consumers before the US government steps in and says, "Hey, we're actually not going to let you do that anymore"?
Now, Warren, notably, thinks we should bring back Glass-Steagall, having worked on the 21st Century Glass-Steagall Act with Republican John McCain in both 2013 and 2017. I also think we should do that. But if we're going to go without it and "trust" the banks to be this big, they should at the very least be prevented from doing the things that made Glass-Steagall necessary in the first place, no?
It's likely this letter will be largely ignored by the Fed and laughed off by Wells Fargo. It shouldn't be. There are going to be consequences no matter what happens, and Wells Fargo being forced to face a few of them is a better outcome than the alternative.
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Robyn Pennacchia is a brilliant, fabulously talented and visually stunning angel of a human being, who shrugged off what she is pretty sure would have been a Tony Award-winning career in musical theater in order to write about stuff on the internet. Follow her on Twitter at @RobynElyse