The time Janet Yellen threw the book at Wells Fargo

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Yellen’s decision to put a one-of-a-kind asset cap on Wells Fargo sent a powerful message to the rest of Wall Street that resonates even louder today as she is on the verge of becoming the first female secretary to the country’s treasury in the Biden administration. If confirmed by the Senate, Yellen will lead a team of regulators tasked with safeguarding the financial system and punishing bad actors.

The former Fed chief’s tough stance on Wells Fargo shows that she is not afraid to take on the big banks, which makes her the hero of some on the left.

“Bringing down Wells Fargo as she left the Fed was not only the right thing to do, but it bolstered her reputation with pro-regulatory progressives,” said Isaac Boltansky, director of policy research at Compass Point Research. & Trade.

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And in citing Yellen as an “exceptional choice” for Secretary of the Treasury, Elizabeth Warren referred to Wells Fargo’s punishment.

“She’s smart, tough and has principles”, Warren tweeted. “As one of the Fed’s most successful presidencies, she has stood against Wall Street banks, including holding Wells Fargo responsible for deceiving working families.”

Warren’s approval is essential, as many on the left were hoping President-elect Joe Biden would appoint her to Yellen for the Cabinet post.

“ Widespread and persistent misconduct ”

The Fed’s statement in early 2018 announcing the Wells Fargo asset cap used unusually colorful language, criticizing the bank for “widespread consumer abuse and compliance failures.”
At the time, Wells Fargo was still in shock to admit that employees had created millions of fake bank and credit card accounts to meet totally unrealistic sales targets. This is in addition to the hundreds of thousands of Wells Fargo customers who have been forced to purchase unnecessary auto insurance. Wells Fargo has also charged mortgage borrowers undue fees and has been sued by small business owners who said the bank used deceptive language to trick family businesses into paying early termination fees.

The Fed voted 3-0 in favor of growth restrictions that prevented Wells Fargo from obtaining more than $ 2 trillion in assets.

“We cannot tolerate pervasive and persistent misconduct in any bank,” Yellen wrote in the statement.

Wells Fargo has assured shareholders that it expects to be out of the penalty box within months. But the company has been unable to convince regulators to lift the asset cap – restrictions that have eaten away at profits by limiting the bank’s ability to make loans. Wells Fargo is also spending heavily on compliance, client refunds, attorneys, and technology to reassure skeptical regulators.

Wells Fargo’s share price has been crushed

Just look at the damage done to Wells Fargo’s (WFC) share price, which has fallen 56% since the imposition of the asset cap. By comparison, rival Bank of America’s (BAC) since then the share price has barely moved. JPMorgan Chase (JPM), the country’s largest bank, grew 6% during this period.

In short, Wells Fargo shareholders have been crushed by Fed sanctions.

“The asset cap has really undermined Wells Fargo’s strategic ambitions,” said Patricia McCoy, a professor of law at Boston College and a former official with the Consumer Financial Protection Bureau. “Here we are years later, and the asset cap is still relevant. It sends a very strong message.”

(Charlie Scharf, CEO of Wells Fargo, who joined the bank almost two years after the asset cap was imposed, applauded Yellen’s “historic appointment” and pledged to work with her.)

On Wall Street, a sigh of relief

And yet Wall Street looks great with Yellen as Secretary of the Treasury. US stocks continued their post-election surge after Yellen’s choice was announced.

“Dr Yellen is certainly the right fit – exactly the right fit, in fact – for the Treasury Secretary position,” wrote Nicholas Colas, co-founder of DataTrek Research, in a note to clients. “Investors should welcome his appointment.”

On the contrary, his appointment may have helped Wall Street dodge a bullet.

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“Bankers know Yellen and seem to have a good working relationship with her, so there is probably some relief among management teams that candidates who are openly hostile to the industry (Warren) have been ignored,” Brian Gardner, analyst Stifel’s chief policy in Washington wrote in a note to clients this week. Biden “leans towards the types of establishments and especially avoids the progressives who could frighten the financial markets”.

In July, former Democratic Congressman Barney Frank told CNN Business it would be a “mistake” for Biden to go with Warren to the Treasury.

“Financial institutions are very negative towards him,” Frank said, adding that such an opinion is unfair. “If you have someone that the regulated people are so opposed to, it doesn’t work well.

No “ rampage ” of Yellen regulations

Yellen is expected to approach Treasury regulation and enforcement as a pragmatist, not an ideologue.

“Yellen’s philosophy is that there is a time and place for a vigorous regulatory response,” said McCoy, the former CFPB chief. “But she understands that over-regulation is a drag on the economy. I don’t see her going wild to regulate aggressively willy-nilly.”

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As Secretary of the Treasury, Yellen would chair the Financial Stability Oversight Council, a team of US regulators that respond to emerging risks in the financial system.
Yellen could also use his new role to prevent banks from returning too much liquidity to shareholders during the pandemic. In April, she urged U.S. regulators to ask banks to suspend dividends and share buybacks to ensure they have enough cash to deal with the crisis. The Fed subsequently halted bank buyouts and capped dividends, although it did not force lenders to cut dividends entirely.
Under the leadership of current Treasury Secretary Steven Mnuchin, the FSOC has played a much smaller role, much to the dismay of Democrats. The FSOC no longer designates large non-bank companies for additional oversight and Mnuchin has even dismantled the council’s research staff.

“They don’t even monitor systematic threats,” McCoy said. “We’re going to see this turn around under Yellen.”



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