Before turning in the executive restroom key last week, outgoing Federal Reserve Chair Janet Yellen had one final task: bringing the hammer down on Wells Fargo. Responding to a litany of failures at one of America’s largest banks, most notably the issuing of 3.5 million fake accounts to customers without their knowledge, the Fed announced sanctions against Wells, including restricting the bank’s growth and removing four board members.
This is not nearly the punishment that Wells Fargo deserves. (I’ve said for months that the bank doesn’t deserve to be in business anymore.) But compared to what the nation’s banking regulators usually do (or rather, don’t do) when faced with financial malpractice, it’s a pleasant surprise and a small measure of accountability. And it’s directly attributable to one woman: Senator Elizabeth Warren, who pleaded with Yellen for months to punish Wells Fargo. The incident shows that you can’t always measure political leadership and success through a legislative scorecard.
Last summer, as news of Wells Fargo’s continued abuses mounted—from issuing unwanted insurance and home warranty products to clients, to repossessing the cars of servicemembers while they were on active duty—Warren and her staff found that, under a section of the U.S. Code, bank regulators had authority to remove members of the board of directors if they “violated … any law or regulation” or “engaged or participated in any unsafe or unsound practice.” In the era of Trump, there weren’t many regulators with the will to take this on, so Warren focused on Yellen, an Obama-era holdover.
By failing to create risk management practices that would have stopped the fake accounts and other abuses, the holdovers on Wells Fargo’s board violated their obligations, according to Warren. As she put it in a detailed letter to Yellen last June, “The Federal Reserve must hold Board members accountable for their risk-management failures—both to ensure the safety and soundness of one of the country’s biggest banks and to show the rest of the banking industry that poor risk-management practices will not be tolerated.”
Warren followed this up in public testimony, urging that all twelve board members present during the fake accounts scandal be fired. “Fines are not working with these giant financial institutions,” Warren told Yellen, pointing to the series of penalties already assessed on Wells Fargo. “If bank directors who preside over the firing of thousands of employees for creation of millions of fake accounts can keep their jobs, then I think every bank director in this country knows that they are bulletproof and that poses a danger to the rest of us every single day.”
This drumbeat continued for months until Yellen finally acted. It wasn’t precisely what Warren wanted. Only four board members have to go, three before April and another by the end of the year. There’s reason to believe Wells was already going to replace the four members, so you could see it as sentencing the bank to commit to its own schedule. Wells Fargo will also have to improve risk management, governance, and board oversight practices, and cannot increase its current asset size until the Fed is convinced of the improvements.
In a conference call, Wells Fargo CEO Tim Sloan estimated this would cost the bank between $300 and $400 million in net income; that’s only 2 percent of expected annual profits. But it’s an interesting sanction for a couple reasons. First, the punishment fits the crime. Wells Fargo issued fake accounts as part of a high-pressure drive to prove sales growth to investors. The whole thing was a securities fraud scandal, and restricting expansion until Wells can grow legitimately is a decent response. Plus, while Wells hasn’t grown much since the fake accounts scandal broke, banks live to build assets, and the inability to do so freezes Wells in place while rival banks shoot past them. The stock market responded on Monday with an 8 percent drop in Wells Fargo shares by mid-afternoon.
All of this is necessary but insufficient. I believe Wells Fargo has reneged on the commitments made in its corporate charter and ought to have that charter revoked. But we’re living at a time when even Equifax’ breach of hundreds of millions of people’s personal data isn’t being examined by regulators. Trump’s deregulatory minions are implementing repeal by neglect, changing the landscape for financial institutions without changing a word of the law. So while I consider Yellen’s closing move only slightly more than a wrist slap, it was a thunderclap relative to the alternatives. And her replacement, Jay Powell, voted for the action and oversaw its negotiations, so it’s not likely to be reversed.
The penalty also creates a couple precedents, though it should have created more. The Fed hadn’t restricted a firm’s growth in this manner in over a decade, let alone forced personal accountability on board members at a major bank. This could lead to a ripple effect across the industry, where board members feel more at risk if their company does wrong. I’d have preferred that the Fed eliminated everyone involved with the fake accounts scandal, and extended this to the CEO, Sloan, who was at Wells the entire time and even said there would be no changes in the bank’s sales strategy just four months before the scandal blew open in 2016. But it’s better than nothing.
For that we can thank Warren. I doubt Yellen would have dumped four board members without Warren’s constant pestering. And this is only Warren’s latest scalp at Wells Fargo. John Stumpf resigned as CEO just days after she undressed him during a Banking Committee hearing in 2016. She has been a one-woman wrecking crew at the bank, and while Sloan remains, Warren has him in her sights as well.
None of that shows up on a legislative stat sheet. It doesn’t reflect a “key vote” or a bill becoming a law. But being a member of Congress is about more than voting. If it weren’t for Warren, Yellen wouldn’t have been Fed chair to begin with; Warren engineered the opposition to Larry Summers for that position. She has used committee hearings and formal letters and pressure that nobody reads about in the newspapers to effect change.
This should be the minimum expectation of our political leaders. A member of Congress wields considerable power. They have a bully pulpit to set an agenda. They can pressure federal agencies to act. They can threaten to hold up confirmations or legislation until they get their way. Leveraging that power takes ingenuity and assertiveness. It takes wanting to do something in office beyond getting reelected. And if done right, it can nudge progress forward.