Wells Fargo scandal highlights failure to hold corporations accountable

Is corporate accountability, like virginity past the age of 16, a dead letter? Unfortunately, based on the latest banking shenanigans, the answer seems to be yes.

On Sept. 8, Wells Fargo, the country’s third largest bank with $1.9 trillion in assets, which has portrayed itself as a bank for Main Street, became the latest to experience a major scandal after it agreed to pay $185 million in fines over the “widespread illegal practice” of opening unwanted accounts to meet sales targets and reap compensation incentives.

Fines included $100 million to the Consumer Financial Protection Bureau, $35 million to the Office of the Comptroller of the Currency and $50 million to the city and county of Los Angeles. Put in context, these fines amount to a rounding error for WFC, which earned $5.6 billion just in the second quarter this year.

The firm also agreed to pay $5 million to customers who incurred fees on the ghost accounts. That works out to an average of about $25 per customer.

As usual, the firm did not admit wrongdoing, despite acknowledging that it has fired roughly 5,300 employees, or about 1 percent of its workforce, over the past five years for fraudulently opening up to 2 million fake fee-generating accounts for products like credit and debit cards, checking and savings accounts for unsuspecting customers. By creating these sham accounts, the firm ripped off customers, who paid overdraft and late fees on credit cards and deposits they

An aggressive sales culture that includes cross-selling, or getting customers to open multiple deposit, mortgage, and investment accounts, has been a hallmark of WFC’s strategy for years. The bank explicitly cites it as a key strategic goal in its 2015 Annual Report. The policy once again proves that you get the behavior you reward.

You don’t need a PhD to know that other “too big to fail” banks are likely engaging in the same aggressive sales practices to make their numbers. After all, it is the promise of increased pay that keeps the engine running.

The bank said of its settlement: “Wells Fargo reached these agreements consistent with our commitment to customers and in the interests of putting this matter behind us.”

But the executive in charge of WFC’s community banking operations made $9 million in total compensation last year and was set to walk away with an even bigger payday when she retired at age 56 at the end of the year. Her payout had been pegged at $124.6 million in a mixture of shares, options, and restricted stock. But the firm’s board of directors under pressure from lawmakers and others said this week she will forfeit $19 million of her stock awards immediately.

Also, the board announced that WFC Chairman and CEO John Stumpf, who has led the bank since 2007 and made $19.3 million in 2015, will forfeit $41 million in stock awards and be ineligible for a bonus this year. He has defended the bank’s cross selling strategy, saying it promotes “deep relationships” and helps customers. He had turned away calls for a claw back of executive compensation when testifying before the Senate last week punting to the board.

While investor support of Wells Fargo continues to deteriorate, Warren Buffet, the bank’s biggest shareholder with 10 percent of its stock, has stayed mum on the scandal.

For all the media attention given to accountability abuses and the continuing debate over whether regulators are doing enough to hold firms accountable, the American public has grown numb to scandalous behavior in the financial community and knows the government won’t punish the perpetrators.

Not all employees are subject to the same standard. Once again, senior executives are granted greater latitude to violate the rules; none of them have lost their jobs. Sadly, it is a truism that accountability rolls downhill in the corporate hierarchy. It’s all very now.

Originally Published: Sep 30, 2016

AIG’s $180 billion bailout still stings


Eight years ago this month the global financial system seemed on the verge of collapse, and its rescue led to the greatest depredation on the public purse in American history. There were many crucial events during the month of the long knives, but no corporation was more central to the mess than AIG.

On Sept. 7, 2008, the federal government took control of Freddie Mac and Fannie Mae and injected $100 billion to ensure the troubled mortgage lenders could pay their debts. On September 15, Lehman Brothers announced it would file for Chapter 11 bankruptcy and Bank of America acquired Merrill Lynch for $50 billion.

Then, in the biggest bank failure in U.S. history, the Federal Deposit Insurance Corporation (FDIC) seized the assets of Washington Mutual, the sixth largest U.S. bank, and JPMorgan acquired the bank’s deposits, assets, and troubled mortgage portfolio from the FDIC. On Sept. 21, the Federal Reserve approved Morgan Stanley and Goldman Sachs transition to commercial banks.

While many blamed the investment banks for high leverage, bad risk management and overreliance on faulty internal models, not to be overlooked is the role AIG, the nation’s largest insurance company, played in the crisis. AIG was once one of the largest and most profitable companies in corporate America, with a gold-plated “AAA” credit rating.

But on September 16, the federal government provided an initial $85 billion in taxpayer cash to bail out the firm. In return, AIG became a ward of Uncle Sam, which acquired 79.9 percent ownership of the company. This was only the first of four bailouts for AIG, totaling an estimated $180 billion.

AIG was in worse shape than Lehman Brothers had been. Yet unlike Lehman, the feds chose to save it. The explanation: AIG was regarded as too big, too global, and too interconnected to fail.

After the 1999 repeal of Glass-Steagall, the law that had regulated financial markets for over six decades, President Clinton signed the Commodity Futures Modernization Act (CFMA) in 2000, which effectively removed derivatives such as Credit Default Swaps (CDS) from federal and state regulation, proving once again that regulators exist to protect the interests of the regulated.

CDS are essentially a bet on whether a company will default on its bonds and loans. AIG was a huge player in the CDS business, which allowed the firm to insure asset-based securities containing sub-prime mortgages against default.

Although swaps behave similarly to insurance policies, they were not covered by the same regulations as insurance after passage of the CFMA. When an insurance company sells a policy, it is required to set aside a reserve in case of a loss on the insured object. But since credit default swaps were not classified as insurance contracts, there was no such requirement.

AIG’s CDS business caused it serious financial difficulties in 2007, when the housing bubble burst, home values dropped and holders of sub-prime mortgages defaulted on their loans. By selling these contracts without reserves, the firm left itself unprotected if the assets insured by the swaps defaulted. AIG had insured bonds whose repayments were dependent on sub-prime mortgage payments. Yet it never bothered to put money aside to pay claims, leaving the company without sufficient resources to make good on the insurance.

Taxpayers stepped in to pay in full the dozens of banks whose financial products were insured with AIG swaps. Unlike in corporate bankruptcies, none of these counterparties were forced to take a haircut, requiring the government to pump more public money into the banks.

To add insult to injury, two weeks after the government provided its fourth bailout to AIG in 2009, it was revealed that the firm was paying $165 million in bonuses to retain key employees to unwind the toxic financial waste. Most people understand that if you go to government for a handout, executives should forgo bonuses. Then again, so much of what happened eight years ago this month defied common sense.

Originally Published: Sep 16, 2016.

The merger that hurt

Why the demise of Glass-Steagall helped trigger the 2008 financial meltdown that cost millions of Americans their jobs, homes and savings

This month is the eighth anniversary of the all-enveloping 2008 financial crisis. Wall Street apologists and many of their Washington, D.C., acolytes argue there is zero evidence that the takedown of the Glass-Steagall Act had anything to do with the meltdown, but the assertion ignores the role the rule of unintended consequences played in the crisis.

Glass-Steagall was enacted during the Great Depression to separate Main Street from Wall Street, creating a firewall between consumer-oriented commercial banks and riskier, more speculative investment banks. During the six-plus decades the law was in effect, there were few large bank failures and no financial panics comparable to what happened in 2008.

In the 1980s, Sandy Weil, one of the godfathers of modem finance, began acquiring control of various banks, insurance companies, brokerage firms and similar financial institutions. These were cobbled together into a conglomerate under the umbrella of a publicly traded insurance company known as Travelers Group.

In 1998 Weil proposed a $70 billion merger with Citicorp, America’s second-largest commercial bank. It would be the biggest corporate merger in American history and create the world’s largest one-stop financial services institution.

Touting the need to remain competitive in a globalized industry and customers’ desire for a “one-stop shop” (a supermarket bank), both companies lobbied hard for regulatory approval of the merger. Advocates argued that customers preferred to do all their business -life insurance, credit cards, mortgages, retail brokerage, retirement planning, checking accounts, commercial banking, and securities underwriting and trading -with one financial institution.

But the merger’s one-stop-shopping approach would make a mockery of the Glass-Steagall firewall. The proposed transaction violated its prohibition of combining a depository institution, such as a bank holding company, with other financial companies, such as investment banks and brokerage houses.

Citigroup successfully obtained a temporary waiver for the violation, then intensified decades-old efforts to eliminate the last vestige of depression-era financial market regulation so it could complete themerger. A Republican Congress passed the Financial Services Modernization Act and President Clinton signed it in November 1999. It permitted insurance companies, investment banks, and commercial banks to combine and compete across products and markets, hammering the final nail into the coffin of Glass­ Steagall.

Now liberated, the banking industry embarked upon a decade of concentrating financial power in fewer and fewer hands. Acquisitions of investment banks by commercial banks, such as FleetBoston buying Robertson Stephens and Bank of America buying Montgomery Securities, became commonplace.

Traditional investment banks suddenly faced competition from publicly traded commercial banks with huge reserves of federally insured deposits. The investment banks faced pressure to deliver returns on equity comparable to those of the new financial supermarkets, which also put competitive pressure on traditional investment banking businesses such as mergers and acquisitions, underwriting, and sales and trading.

In response, the investment banks sought to raise their leverage limits so they could borrow more money to engage in proprietary, speculative trading activities. In 2005 they convinced the Securities Exchange Commission to abolish the “net capital” rule that restricted the amount of debt these firms could take from 12-1 to 30-1, meaning the banks could borrow 30 dollars for every dollar of equity they held.

By 2008, increased leverage and speculation on toxic assets would ravage investment banking, leading to the collapse, merger, or restructuring of all five major Wall Street investment banks. During a six­ month period, Bear Stearns collapsed into the arms of JP Morgan, Lehman Brothers filed for bankruptcy protection, Merrill Lynch merged into Bank of America, and Goldman Sachs and Morgan Stanley converted to bank holding companies, giving them access to precious short-term funds from the Federal Reserve’s discount window.

The demise of Glass-Steagall may not have been at the heart of the 2008 financial crisis but it certainly contributed to the lunacy of financial deregulation. Had the law not been neutered, it would have lessened the depth and breath of the crisis that cost millions of Americans their jobs, homes and savings.

Originally Published: Sep 3, 2016