July 31, 2019 – Two words – “mid-cycle adjustment” – from the Federal Reserve rocked markets on Wednesday. But at the post-meeting conference, Chairman Jerome Powell dropped another bombshell that reverberated in the small, arcane world of public finance investment banking.
Wells Fargo, the Chairman said, has yet to demonstrate satisfactory progress on governance and customer restitution. Therefore, the Federal Reserve is in no hurry to lift the asset cap imposed on Wells Fargo in February 2018. Under the cap, the bank is forbidden from increasing its balance sheet beyond 2017 levels.
Wells Fargo has been in the cross hairs of regulators since 2016, when the company announced it had opened 3.5 million fake accounts, forced over 1 million automobile borrowers to purchase insurance they could not afford and fired over 5,000 employees the bank says were negligent or fraudulent.
Municipal Issuers Remain Wary
Ironically, the asset may have helped the bank in 2019, as erratic capital markets negatively impacted large trading houses like Goldman and Morgan Stanley. Wells Fargo’s 2Q revenue and earnings exceeded consensus expectations, and the stock is slightly up for the year.
In the municipal finance industry however, Wells Fargo continues to be viewed warily by issuers. BuyMuni spoke with two governmental issuers in New York and California, both sources indicated the bank’s “social impact” rating was adversely affected by the events of the past few years.
Wells Fargo remained black-listed by New York City – the largest municipal bond issuer in the country on a combined basis, including its sales tax credit and Water Sewer debt entity.
In May 2017, New York City Mayor Bill DeBlasio and Comptroller Stringer banned Wells Fargo in 2017 from municipal underwriting.
Referring to Wells Fargo’s “Unsatisfactory” Federal Community Reinvestment Act rating or CRA Rating, Mayor de Blasio said:
“The rules are very clear: if you fall below ‘satisfactory,’ we will no longer do banking business with you. I encourage Wells Fargo to quickly clean up its act and do right by the millions of customers who trust the bank with their savings. Until then, we will not be entering new contracts with the bank.”
Comptroller Stringer said:
“What happened at Wells Fargo was a fraud – and there should be consequences. We need to send a message to this bank and the broader industry that ethics matter. Public trust is a must – and accountability is non-negotiable. That’s why we plan to take action. We have an opportunity to stand up and do the right thing today, and that’s a moment we plan on seizing.”
Contact Jumanne Johnson at JJohnson@BuyMuni.com.
