Dealing with long-term repeat offenders is one of the knottiest problems in criminal justice. Judging by yet another revelation about Wells Fargo’s normal practices toward its customers, it seems to be a knotty problem in banking regulation too.
According to the Wall Street Journal, Wells tried to steer people in 401(k) accounts the bank managed into rolling over these into IRAs that produced higher fees for the bank. It seems there was little limit to the venality and fundamental dishonesty of the bank, which has Minnesota roots and was headed by a Minnesotan when such abuses became standard operating procedures. It remains Minnesota’s largest bank by deposit markets share.
It is time for regulators to say “No more Mr. Nice Guy!”
Wells Fargo, now based in San Francisco, has good lawyers and may not have broken any laws, although an investigation by the Labor Department, which regulates pension plans including 401(k)s, is ongoing. Wells already has been fined for abuses of customers revealed over the last 21 months.
The last was just a week ago when the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency, the primary regulator of nationally-chartered banks, imposed a $1 billion fine on it for car loan and mortgage abuses. This follows the Feb. 2 imposition by the Federal Reserve of an unprecedented freeze of growth of the bank until further notice. Under this provision, the bank cannot increase total assets.
Yet big corporations, particularly financial ones, can shrug off what appear as enormous fines. Yes, current earnings are hit and shareholders may be miffed, but this represents dogs barking while the caravan moves on. Despite contentious moments at its annual meeting a week ago, shareholders approved big pay packages for current management. As yet, it is unclear to what extent the 401(k) abuses were a thing of the past or whether they had continued after a new management team was installed to replace that headed by John Stumpf.
Regulators need to consider a drastic step, shutting the bank down by suspending or withdrawing its federal bank charter. This would be an unprecedented step for a bank this size. But when a regulating authority never exercises its power, the regulations lose their deterrent value. Wells’ abuses may have been particularly egregious, but do not kid yourself, there are similar abuses at other banks.
Note that I am not a banking law expert. And I am well aware of the U.S. Constitution’s explicit ban on ex post facto laws that would punish people for acts committed when not strictly illegal. Nevertheless, banks are special businesses, fundamentally different from a steel company or one producing cell phones.
You don’t need a federal charter to run a hardware store, manufacture urinary catheters or sell data gleaned from customer’s social media accounts to businesses. But you do need a special piece of paper from either state or federal government to run a bank.
The difference is that you are administering other people’s money. Banks are not the only businesses in such a fiduciary operations. Life insurance and mutual fund companies also administer other people’s funds.
But banks also have special protection through federal deposit insurance and through the financial backstopping of the Federal Reserve. And, in a system of fractional reserve banking, they benefit from the singular process by which the total amount of money and loanable funds is a multiple of the nation’s underlying monetary base. (Yes, you need some college econ to understand this last point, but it is important.)
Anyone who meets minimal state laws can open a bookstore, start shoeing horses or fixing computers. Government cannot refuse, on discretionary grounds, to let you open. But bank regulators have vast discretion in the issuance of new charters. And they have considerable discretion to restrict or cancel the powers granted in a charter. So perhaps it is time for the OCC to just pull Wells Fargo’s charter.
Yes, this would deprive stockholders of billions of dollars of value. Yes, it would require an enormous wind-down procedure as existing loans and accounts would have to be transferred elsewhere. Yes, it would roil financial markets. Yes, thousands of employees would need other employment, although liquidation probably would involve selling off business units and existing bank facilities to other owners.
So why do it? The reason is to do away with the culture of impunity that prevails in the corporate suites of many banks. It is the equivalent of “decimation” of Roman legions or the old-time practice in the French army of occasionally shooting some sub-par soldiers “por encourager aux autres” or “to give courage to the rest.”
Yes, millions of people like me might see a blip in our own retirement accounts. Yes, old widow Perkins might get hit hard on her 10 shares. But the whole nation is being bled now by the impunity that exists.
Here’s the economics of it: “Principal-agent problems” create economic inefficiency. These are situations in which some “agent,” such as the hired managers or executives of a corporation, make decisions based on feathering their own nests rather than furthering the well-being of the “principals” who hired them, in this case the shareholders. Such problems are ubiquitous in modern corporate governance. But they are also intractable. It is difficult to design changes in corporate law to eliminate such perverse incentives and politically nigh-impossible to enact them. The special status of bank charters is a crack in which reformers might wedge a strong pry bar.
Do I think this is going to happen? No. Recognize however that we live in a new “Gilded Age” in which “malefactors of great wealth,” to use Teddy Roosevelt’s term, abuse the public with impunity. This seemed obvious to many during and after the financial debacle that began to unfold in 2007. Ordinary people lost their homes, people lost jobs in the recession, but the corporate execs responsible for the problem kept their wealth and in many cases increased it.
A century ago, progressives like TR and Woodrow Wilson pushed through reforms over the objections of conservatives in their respective parties. These, and the ones enacted in the 1930s, preserved the U.S. mixed-market economic system. The alternative is populistic nationalism that chases villains identified by race or religion and cuts an economy off from the world. So no, it is not likely that anyone will shut down Wells Fargo. But we ought to give it serious consideration.