Wells Fargo: We Go Far Beyond the Law

Jun 12, 2023

The drumbeat of Wells Fargo scandals never stops. The fake accounts in which salespersons opened millions of accounts for customers without their consent. The case last year in which the San Francisco megabank had to pony up $3.7 billion in penalties and redress. The discrimination. Don’t be suprised when Wells Fargo comes up at congressional hearings this week.

There’s a reason the famous “Wells Fargo Wagon” made an appearance on Saturday Night Live, and it’s not a good one. Wells Fargo has racked up numerous egregious abuses against its own customers that are laid in a new report.

The document, titled “The Misdeeds and Missteps of a Megabank,” provides a snapshot of the bank’s major misdeeds going back as far as 2010. It includes, at this time, 43 entries – complete with links to good late-night humor:

But what American consumers need is not a joke. They need decisive action from the federal government to break up this massive bank, which has proven itself “too big to manage.” AFR has called for this step (read here for some details). But the key regulator, Michael Hsu, the Acting Comptroller of the Currency, has not acted. He needs to. It’s long past time for change.

FINANCIAL STABILITY

Commercial Real Estate.

Regional and local banks are the biggest lenders when it comes to retail and office space; office values are down 27% on average and the average commercial property is down 15%, per Bloomberg. A greater proportion of risky loans have been piled into commercial mortgage-backed securities: more than 4% overdue by at least 30 days as of May, the highest level since 2018.

Related: Goldman Sachs experienced a wave of loan delinquencies in Q1, with their value of loans to CRE borrowers behind on repayments jumping 612% during the period. That number was up only 30% across the entire banking industry.

Rates and Recession.

After a protracted period of rate-raising, the Fed is expected to pause this week. That doesn’t mean the pressure is off of consumers and businesses just yet, reports Politico. With inflation still going strong and high price increases in key services sectors, rates are likely to remain high this year. Over a third of 86 surveyed economists foresee another hike sometime this year; only over a quarter forecast a rate cut.

Related: The case for a pause is helped, writes Bloomberg, by the Fed’s moving away from wage gains as explanation for inflation. Traditionally, Fed officials believed that scaling back wage increases was necessary to curb inflation. Now, many economists and even Chair Powell aren’t sure the link is so direct. Also: Despite the Goldman recession likelihood estimate coming back down to 25%, bond investors believe a recession is inevitable, reports Bloomberg.

That puts Powell in a difficult spot, explains WSJ. A potential credit crunch induced by financial instability calls for loosening monetary policy; high inflation calls for the opposite. Minneapolis Fed’s Kashkari says a rate-cut is possible later this year or next if inflation falls quickly.

Exec Comp Clawbacks.

Senate Banking will not vote this week on executive compensation clawbacks, reports Politico. Last week, Sen. Brown indicated that the Committee would meet to mark up relevant legislation, but that’s been postponed to provide more time to discuss the plan. On Thursday, Warren said she was in talks to include her bipartisan clawback bill in the vote.

Deposits.

Financial Markets researcher Jim Bianco provides a number of useful charts depicting how deposits have been behaving lately. Some highlights: about $1.4tn has left accounts since March 2022, with the lion’s share ($900bn) having gone into money market funds and much of the remainder into certificates of deposit.

This has been the largest “drawdown” in deposits since 2001. Except for that year, due to 9/11 infrastructure damage, it’s the largest in 50 years.

Risk Capital.

Bank Reg Blog gives a summary of Basel operational risk capital requirements and flags what to look out for when it comes to the possibility of upcoming requirements. Regulators, they write, will need to determine the banks upon which to apply a standardized measurement approach (SMA), which the Basel Committee ultimately opted to use to calculate risk-weighted assets (RWA). Additionally, they need to evaluate the treatment of fee-based activities; the bank lobby believes the new standards would come down too hard on these activities as operational risks.

Dictators, Jeffrey Epstein and Crypto.

Wall Street on Parade investigates a class of people called “relationship managers,” who they say bridge the gap between the banks and their problematic clientele. In 1999, a Senate subcommittee explored the role relationship managers at Citibank’s Private Bank, which served a host of troubled heads of foreign states, the likes of the Paraguayan dictator Albert Stroessner or Nigerian dictator Sani Abacha. At JPMorgan, a relationship manager oversaw Jeffrey Epstein’s accounts (related: JPMorgan has settled for $290mn with Epstein’s victims, who say the bank was the “financial conduit” that allowed the sex trafficker to continue his operations). And it was relationship managers who handled large crypto clients at Silvergate and Signature.

CONSUMER

Support for CFPB.

AFR led a letter sent to Senate Banking’s Brown and Scott and House Financial’s McHenry and Waters with sign-ons from 84 national, state and local groups rallying in support of the CFPB and opposing attempts to subject it to congressional appropriations. The letter highlights the Bureau’s strides to recover $16bn in relief for about 192mn consumers.

No Rise for this Phoenix.

The Consumer Financial Protection Bureau slammed medical debt collector Phoenix Financial Services with a $1.675mn penalty for its rap sheet of debt collection and credit reporting violations. In thousands of cases, Phoenix attempted to collect on unsubstantiated debt after the consumer disputed its validity, pressuring them to pay up with unlawful debt collection letters. Last year, the CFPB released a report indicating that inaccurate information partly contaminated the $88bn worth of medical debt on Americans’ credit reports.

Supreme Court and Student Loans.

WSJ explores how SCOTUS wields immense power to influence Americans’ financial lives, with an eye toward the Court’s coming decision on Biden’s student-loan cancellation program. What else have they had a hand in? Social Security, in which Roosevelt-era justices upheld the program’s constitutionality; health insurance, when they decided states could continue providing Affordable Care Act tax credits; minimum wage, when one ruling led to Roosevelt’s signage of the Fair Labor Standards Act; and credit cards, when a case in the late ‘70s erased the legal limits on interest rates on credit card debt.

The Quantum Realm.

Going quantum isn’t just in Ant-Man’s arsenal. The Bank of Canada released a working paper making the case for heightened defense from quantum computer attacks in light of a rise in digital payments and decentralized systems. The futurethink pitched here would allow users to register with financial service providers without offering up revealing personal information, minimizing the possibility of data leaks.

CAPITAL MARKETS

Interest Deduction Rule.

A new report from Americans for Tax Fairness documents Republican efforts to overturn a provision of a 2017 tax law which limits corporations’ ability to deduct interest payments from their taxable income. Widening the loophole would result in as much as $200bn in lost revenue over 10 years, ending up instead in the pockets of Wall Street. Private equity, led by the American Innovation Council, has lobbied hard to see the change through and weaken interest rules.

PRIVATE MARKETS

A Bad Itch.

A new research paper roots out how private equity groups are getting under the skin of dermatology clinics across the U.S. Despite a spate of failures of dermatology PE-backed groups (DPEGs) in the 90s, they’ve expanded rapidly in the past decade. Loopholes have enabled the circumvention of state laws restricting corporate medicine ownership. Under DPEGs, clinics and their patients often suffer from overreliance on nonphysicians, higher healthcare costs, monopolistic practices and debt burdens.

Alts.

The top six publicly traded alternative asset managers have bought majorly into private credit, leaving private equity with a smaller share of their fundraising and assets-under-management. One of the biggest factors behind the growth, writes Pitchbook, may be attributable to the asset managers’ “push into managing long-duration insurance assets.”

Family Offices.

Family offices are on the rise, writes Forbes, standing larger than private equity and venture capital combined. As PE and VC drifted away toward assets-under-management strategies, the interests of fund managers and investors fell out of alignment. Family offices recalibrate those shared interests while being able to control a large amount of capital. A reminder: JPMorgan has picked up on a rising interest in family offices among the ultra-rich, targeting them with their 23 Wall investment arm.

CRYPTO

Congress and Crypto.

American University prof. Hilary Allen takes aim at House Republicans’ efforts to roll out their crypto-friendly bill: “lawmakers should stop trying to make crypto happen.” Allen notes the complexity contained in the 162-page package risks becoming outdated as blockchain tech improves, suggesting that simpler rules would be more effective defending the public interest. In addition, the bill would require the SEC to consider whether its rules “promote innovation” – a provision that could easily be weaponized in court by litigious crypto proponents – and would expose retail investors to harm.

“In reality, a lot of financial innovation is designed to serve the innovator, not the public. If SEC rulemakings accommodate private sector innovation in the way this draft legislation intends, that will fundamentally undermine the investor protection mission of the regulator.”

Landmark Crypto Case.

In what Politico calls a “landmark crypto case,” a federal judge has ordered the online investment platform Ooki DAO to shut down in a win for the Commodities and Futures Trading Commission. It’s the first time a decentralized autonomous organization (DAO) “has been found liable for operating an illegal commodities trading platform” and it’s the CFTC’s most significant enforcement action against such a platform. Pro-crypto elements, among them Andreessen Horowitz and DeFi Education Funds, were unhappy with how notice was served; the CFTC had to send it to a chatbot on Ooki’s website and to an online forum where the network’s users congregated.

Crypto Banking.

After the collapse of Silvergate and Signature and amid regulatory pressure on the industry, U.S. crypto firms look to regional lenders to open new accounts, making their new system “more fragmented, less US-centric and, at times, less advertised, “ according to Bloomberg. The loss of wider banking access forces exchanges into an isolated corner from the broad finance industry. One of the more popular destinations has been Pennsylvania-based lender Customers Bancorp.

Crypto Exchanges.

Bloomberg reports Binance.US informed investors via email that its payment and banking partners would retract their support for “the exchange’s dollar channels” as early as June 13, eliminating the exchange’s ability to process transactions in dollars. The research firm Kaiko predicts that a growing liquidity problem will cause problems for traders looking for accurate pricing.

Crypto.com will halt its services for institutional clients in the U.S. toward the end of June due to “limited demand” and the “current market landscape,” reports Coindesk. Retail investment will remain largely untouched.

HOUSING

Tenant Misery.

The Nation explores how private equity, encouraged by the Federal Home Loan Mortgage Corporation (Freddie Mac), preys on tenants. Rampant speculation sees firms overburden multifamily units with debt so their owners might turn them around “before the debt catches up to them.” That means neglecting maintenance to leave tenants living in untenable conditions. Freddie Mac continues to purchase these mortgages, identifiable by low expenses and/or high loan values. But, warns the writer, stalling housing sales, high heating costs and hiked-up insurance premiums means once private equity’s had its fill, it’ll leave tenants and local governments with the scraps.

Old Loans.

Realtors are sweetening the deal with walk-in closets, refurbished kitchens and old 30-year mortgages, reports NYT. Hopeful homebuyers-to-be can inherit years-old mortgages from a time when rates were under 3 percent, while current monthly mortgage costs are over double their levels from 18 months ago. Supply of homes on the market is low and home prices have stabilized as people who secured these low-rate mortgages don’t want to give them up.

Related: The National Association of Realtors examines the issue of affordability and availability. Supply may be relatively limited, but inventory is slowly on the rise. Affordability, meanwhile, is fairly low. More than one million homes are for sale, but not adequately distributed across all income levels. For example, 51% of households earn $75,000 or less, so they should be able to purchase 51% of homes, in theory. But in reality, only 23% are in their reach. Their new report investigates how many homes are needed to close that disparity.

Rent Inflation Tracking.

Economics writer Joey Politano highlights the New Tenant Repeat Rent Index (TRRI), a metric released last year by the Bureau of Labor Statistics and Cleveland Fed that Politano calls “the single most important new inflation indicator.” The TRRI tracks the price of new leases in the consumer price index (CPI). Year-on-year growth has now hit 0%.

Politano explains the measure in greater detail here. Housing is a significant expense for consumers, accounting for about a third of the CPI, meaning watching housing prices is a “highly critical part of measuring inflation,” he writes.

Financial Justice

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