Wells Fargo can’t seem to find the bottom of its scandals. That’s becoming bad news for the entire banking industry.
The fake-account mess that originally landed the bank in hot water turns a year old in September and still isn’t resolved. It’s since been joined by a slew of other revelations and accusations. The bank charged more than 800,000 people for auto insurance they didn’t need. It slapped veterans with hidden fees to refinance their mortgages. A group of young immigrants are suing over allegations Wells Fargo denied them student loans and credit cards — a suit Wells tried to have tossed but a federal judge greenlit on Thursday. In a regulatory filing on Friday, the bank signaled it could soon have still more headaches to disclose. And on Monday came the news it's facing regulatory scrutiny from the Federal Reserve Bank of San Francisco for not refunding insurance money to people who paid off car loans early.
News of the first auto loans controversy alone prompted fresh calls for hearings into the bank’s practices from congressional Democrats on both sides of the Capitol last week — and one Senate Republican, Jerry Moran of Kansas. All the Democrats on the Senate Banking panel signed on to a request to Sen. Mike Crapo (R-Idaho), who chairs the committee, for a September hearing with Wells CEO Timothy Sloan and board chairman Stephen Sanger. And Sen. Elizabeth Warren (D-Mass.) renewed her request of Federal Reserve Chairwoman Janet L. Yellen that the central bank use its authority to fire directors who served during the fake-account scandal.
The cascade of controversies has marred the bank’s once-sterling brand. Wells now ranks as the least-respected company in America, behind even Big Tobacco, according to a June survey of money managers conducted by Barron’s. And it’s share price has suffered, too, lagging further behind its peers than at any time since 2011. Bloomberg’s Kartikay Mehrotra, Laura Keller, and Margaret Cronin Fisk have a good rundown of the bank’s no-good, very bad year. For the rest of the sector, here’s their key insight:
Don’t banks get in trouble all the time?
U.S. banks have paid huge sums to settle all sorts of allegations related to market-rigging and investor-fleecing, many involving mortgage-backed securities. But those settlements are almost always related to wholesale banking, as opposed to retail. Wells Fargo’s current scandals are different because they deal with customers in the consumer division. That’s more unusual, and a more politically sensitive problem.
Although Wall Street is a favorite punching bag of both parties — see the 2016 election — refining campaign-trail animus into relatively inscrutable banking regulation is another matter. So less than a decade after a financial crisis that almost destroyed the economy, the debate over banking rules in Washington these days centers on how much relief to provide the industry from the Dodd-Frank law passed in its wake. That's left Democrats who'd like to impose new restrictions on the biggest financial institutions struggling instead simply to hold the line by defending the rules already on the books.
The Wells Fargo mess, however, put industry overreach in terms everyday consumers understand. Democratic lawmakers and their allies backing tougher oversight are taking heed. They're marshaling the example of the Wells Fargo imbroglio to try to protect a new Consumer Financial Protection Bureau rule making it easier for consumers to sue their banks. House Republicans already voted to strip that rule, and their Senate counterparts will attempt to follow suit next month. Backers of the so-called arbitration rule argue Wells Fargo customers could have brought the bank's issues to light sooner if they hadn't been forced into contracts that barred them from challenging the bank in court.
It's not hard to imagine industry critics making even more hay out of the bank's malfeasance. As Cap Alpha's Ian Katz wrote late last month, the nesting Wells scandals could "end up being unhelpful to broader efforts to reform Dodd-Frank, because it strengthens the arguments of Democratic lawmakers including Elizabeth Warren and Sherrod Brown that banks need tougher, not lighter, oversight."
"Sure," Katz continued, "one could argue that Dodd-Frank didn’t prevent Wells Fargo’s sales practices scandal or this auto loans mess. So what good is it? But for the average bloke, that doesn’t translate into a reason for weakening oversight of banks."
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— Corporate chiefs in the Obama era made a refrain out of complaining that “Washington uncertainty” was tying their hands and holding back growth-unleashing investments. In the Trump era, they’re still making that complaint. My colleague Damian Paletta reports: “A Washington Post review of dozens of conference calls in recent weeks between chief executives and analysts show how the fog of policymaking is paralyzing many companies from taking risks that in normal times would help them grow. The conference calls were held as part of a quarterly ritual in which executives discuss their firm's performance and outlook for the future, and they give voice to some of the reasons U.S. economic growth has been so weak at a time when inflation and interest rates remain historically low... Many of the executives did not blame President Trump or Congress directly for the uncertainty, but they remarked that promises made at the beginning of the year have not come to fruition and might not anytime soon.”
Trump's stalled trade agenda, specifically, is causing problems for sectors that believed the administration's pledges it would act quickly. The New York Times's Alan Rappaport reports:
America’s steelworkers are on edge as they wait for Mr. Trump to fulfill his promise to place tariffs on steel imports. Home builders are desperate for the president to cut a deal with Canada to end a dispute over its softwood lumber exports. And cattle ranchers are longing for a bilateral pact with Japan to ease the flow of beef exports...
The Commerce Department was poised to deliver a report to Mr. Trump by the end of June with recommendations for steel tariffs, on the ground that cheap imports pose a national security threat. But the process became bogged down when industries that buy steel objected and other countries threatened retaliation. Mr. Trump said recently that dealing with steel was no longer a top priority, and Wilbur Ross, the commerce secretary, signaled to members of Congress in briefings last month that a decision was no longer imminent.
Dithering may have made the situation worse for American steel producers. Mr. Gerard said foreign competitors had been flooding the United States market with steel products in anticipation of the tariffs. Some of this is happening in parts of the country that voted for Mr. Trump...
One accomplishment that Mr. Trump has notched on trade has been an agreement with China that opened its market to American beef exports. For the beef industry, however, the benefits of that deal pale in comparison with the cost of abandoning the Trans-Pacific Partnership, which had been spearheaded by President Barack Obama. It would have provided access to the enormous Japanese market.
Instead, Japanese tariffs on American frozen beef, which would have declined under Mr. Obama’s deal, are on the rise. Last week, they increased to 50 percent from 38 percent, making America’s meat even more vulnerable to competition from countries such as Australia.
Meanwhile, colleague Heather Long says American steel companies have China to thank for surging prices: "China is a major factor driving this "summer of steel." The Chinese government has finally curbed some steel production, acknowledging that a glut of steel on world markets was causing prices to fall so low that even Chinese companies couldn't turn a profit. At the same time, China is hungry for steel as it upgrades its infrastructure. Lower Chinese supply and higher Chinese demand has sent steel -- and other metal -- prices up around the world. All of this is great news for steel companies."
— Inflation isn't going anywhere, so neither should interest rates, St. Louis Fed President James Bullard told the America's Cotton Marketing Cooperatives 2017 Conference in Nashville. From Reuters: "Bullard's comments are largely in line with those he has been making for over a year. He has argued that the Fed does not need to raise rates until the U.S. economy breaks out of its pattern of low inflation and about 2 percent annual growth. Most of his Fed colleagues have stuck to their forecast that inflation is headed back to 2 percent over the next couple years, even though their forecasts have proven overly optimistic for years. Bullard noted that the dollar has declined in value this year, chalking that move up largely to improved growth forecasts for Europe and the expectation that the European Central Bank will respond by tightening monetary policy."
— Illinois Gov. Bruce Rauner (R) is stiff-arming a request from the state comptroller to issue $6 billion in new bonds to help pay down the state's debt. Instead, he called on the comptroller to tap $600 million in state coffers to pay some bills. Reuters: "Rauner also said the state cannot go to market with the debt until he works with state lawmakers to identify an appropriation or plan to pay off the new bonds. 'This bonding in and of itself is not the answer,' Rauner told reporters...Illinois has the lowest credit ratings and pays the highest borrowing costs among the 50 U.S. states."
— Meanwhile, the hedge fund Aurelius Capital sued Monday seeking the dismissal of Puerto Rico's bankruptcy case, arguing the federal oversight board trying to hold off the island's creditors was unconstitutionally established. Aurelius was among those that successfully pressed a legal case against Argentina over its sovereign debt. The New York Times's Mary Williams Walsh reports: "Some of Puerto Rico’s bondholders argue that they bought the bonds on the understanding that their repayments and interest were by law the government’s first priority. They were surprised when they found that Puerto Rico’s five-year plan called for deep cuts in all bond payments, including payments to the holders of general-obligation bonds. The oversight board wants to use the savings to finance government operations for the five-year recovery period. But creditors say this approach is at odds with the Puerto Rican Constitution."
— The Trump administration is reaching out to a "few dozen" House Democrats on a tax overhaul to court their support even as the congressional Republicans driving the process pursue a GOP-only approach. Politico's Rachel Bade and Elana Schor report: "Even as congressional GOP leaders largely embrace a partisan path on taxes, White House officials have been wooing 15 to 20 centrist House Democrats since early summer. The Trump administration is all too aware of Congressional Republicans’ struggles to come together on a range of hot-button issues — from health care to government spending — and tax reform is littered with political minefields for the party. So the president and his staff are opening a line of communication with moderate Democrats in case a Plan B is needed. At a mid-June dinner at the White House with four centrist House Democrats, President Donald Trump expressed interest in a bipartisan package combining tax reform with infrastructure spending, multiple sources said. Since then, Treasury Secretary Steven Mnuchin, chief economic adviser Gary Cohn and top White House staff have huddled with conservative Democrats in the Blue Dog Coalition and the bipartisan Problem Solvers Caucus."
— Does the economy really need tax cuts? Maybe not, economist Ed Yardini tells CNBC: "I don't think that given the strength of the labor market and the tightness of the labor market that the economy needs any fiscal stimulus. It ain't broke so there's no reason to fix it."
— Peter Thiel, the technology investor who became one of Trump's most vocal and important private-sector champions, harbors private doubts his presidency could end in disaster. BuzzFeed's Ryan Mac reports: Donald Trump’s most prominent Silicon Valley supporter has distanced himself from the president in multiple private conversations, describing at different points this year an 'incompetent' administration, and one that may well end in 'disaster.' Peter Thiel’s unguarded remarks have surprised associates, some of whom are still reeling from his full-throated endorsement of Trump at the Republican National Convention. And while the investor stands by the president in public — 'I support President Trump in his ongoing fight,' he said in a statement to BuzzFeed News — his private doubts underscore the fragility of the president's backing from even his most public allies.
— Trump may finally have found a replacement for Preet Bharara, the head of the U.S. attorney's office in Manhattan he fired back in March. BuzzFeed's Zoe Tillman reports: "The White House is considering Geoffrey Berman, an attorney who practices in New Jersey and New York and one of Rudolph Giuliani’s law partners, to lead the US attorney’s office in Manhattan — one of the most high-profile federal law enforcement jobs in the country. Berman’s name was included as part of a package of proposed candidates for New York judicial and US attorney vacancies sent by the White House in mid-July to New York’s Democratic senators, according to a source familiar with the process. The list offers an early glimpse at the Trump administration’s strategy for filling vacancies in states with two Democratic senators. Berman, who did not immediately return a request for comment, was the only name that the White House proposed for US attorney in the Southern District of New York."
— Sen. Warren has put a hold on Makan Delrahim, President Trump's pick to lead the Justice Department's antitrust division. The move will keep Delrahim sidelined while Justice lawyers continue reviewing AT&T's proposed $85.4 billion tie-up with Time Warner. Bloomberg's Sarah Forden and Billy House report: "Warren has described the nomination of Delrahim, a former deputy assistant attorney general in the antitrust division, as an indication that Trump’s administration will "put the interests of giant corporations ahead of the American people," according to an April 3 post on her Facebook page. Delrahim was previously an attorney at law firm Brownstein Hyatt Farber Schreck LLP and lobbied on behalf of companies pursuing mergers. He worked for insurer Anthem Inc. in its failed bid for rival Cigna Corp., a deal the Justice Department successfully sued to block."
— Edward Kleinbard, writing in the New York Times, thinks we're headed toward a debt default: "Sometime in October, the United States is likely to default on its obligation to pay its bills as they come due, having failed to raise the federal debt ceiling. This will cost the Treasury tens of billions of dollars every year for decades to come in higher interest charges and probably trigger a severe recession. The debt ceiling is politically imposed, and the decision not to raise it, and therefore to choose to default, is also political. It’s something America has avoided in the past. This time, though, will be different."
— Jared Bernstein, writing in The Post, thinks Republicans are on track to pass a deficit-busting tax cut for the wealthy: "Thus far, the administration has shown neither skill nor interest in the work of legislating, which requires analysis, organizing stakeholders and close work with your congressional partners. But while much of the focus will be on the process of tax reform, it’s essential to recognize that there is as yet no tax reform. There are only highly regressive, revenue-losing tax cuts. Real tax reform, meaning tax changes responsive to the needs of the majority of the American people now and in the future, would push back on, instead of exacerbate, market-driven inequalities and raise the necessary revenue to meet the many challenges we face."
For the last time, Trump hasn’t made the economy any better, writes The Post's Matt O’Brien:
- The Carnegie Endowment for International Peace holds a discussion on oil corruption.
- The Economic Policy Institute holds an event on the Regulatory Accountability Act on Thursday.
- Congress is on recess until September 5.
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