Is this what a "soft nationalization" looks like?
Wells Fargo may be Warren Buffett's favorite bank, but the endorsement of America's favorite benevolent plutocrat hasn't spared it from an unusually severe punishment: two hours after markets closed on Janet Yellen's last day in office, the Fed announced unexpectedly harsh sanctions against Wells for a host of consumer and oversight abuses dating back to its infamous cross-selling scandal, barring the bank from growing until it fixes its criminal culture.
In a late Friday press release - one which is certain to exacerbate today's selloff when markets reopen on Monday- the Fed said it would bar Wells from expanding its assets beyond their end-2017 level until it "sufficiently improves its governance and controls."
Also, the Fed is demanding that Wells replace three current board members by April and a fourth board member by the end of the year. The release says the board of directors must also improve its oversight practices. The bank will not be allowed to grow until the Fed approves a detail plan of action to be submitted by the bank.
"The enforcement action we are taking today will ensure that Wells Fargo will not expand until it is able to do so safely and with the protections needed to manage all of its risks and protect its customers,” Yellen said in a statement. "The enforcement action we are taking today will ensure that Wells Fargo will not expand until it is able to do so safely and with the protections needed to manage all of its risks and protect its customers."
As the release explains, in recent years, Wells pursued a business strategy that prioritized growth over managing risks and offering sufficient oversight of the firm's lending practices. As a result, the firm cheated customers of its auto-lending division and also overcharged some mortgage borrowers. And that was AFTER the cross-selling scandal mentioned above. The bank is also facing a criminal probe into its foreign-exchange desk, which allegedly overcharged its large corporate clients. The firm also lacked "an effective firm-wide risk management framework in place that covered all key risks." This, the Fed says, prevented the serious compliance breakdowns from being adequately reviewed by the board.
Emphasizing the need for improved director oversight of the firm, the Fed's disciplinary board sent a letter to Wells Fargo board members confirming that the firm's board of directors did not meet supervisory expectations during the period when these abuses were perpetrated. Letters were also sent to former Chairman and Chief Executive Officer John Stumpf and past lead independent director Stephen Sanger stating that their performance in those roles, in particular, did not meet the Federal Reserve's expectations.
Wells has provoked a vociferous public outcry because of these abusive lending practices, which have impacted millions of Americans. The pension funds of several states and municipalities have even divested their WFC shares in protest.
Responding to the letter, Wells promised to make things right and its board said it would deliver its improvement plan within 60 days.
As a result of Yellen's "parting gift" which came after today's market bloodbath which in point terms was the biggest Dow plunge since the financial crisis, even greater than the US downgrade in August 2011, WFC shares plunged a staggering 8% in after-hours trading now that the Fed appears to also be finally a regulator as well.
Or maybe not, because now Wells at least has an excuse justifying why its business model is in secular decline.
Remember that earlier this month we showed that Wells reported the worst mortgage numbers since the crisis. It's not as if the bank needed the Fed to tell it it is prohibited from growing - there just was no demand for its core products: mortgage loans.
Now Wells has a convenient scapegoat to explain away why it sucks so bad at what it does: the Fed's crackdown on its criminal culture... an act which may have just bought Wells 2-3 quarters of time before it has to explain to Wall Street why its "bread and butter" mortgage lending business is in the shitter.