Wells Fargo: Sawant tries to cut the city’s ties, and the bank’s apology letter

On Monday, Council member Sawant introduced a draft ordinance in response to recent unsavory acts by Well Fargo Bank.  Let’s look at the details of that bill, as well as the recent back-and-forth communications between the city and the bank.

At a high level, the bill makes several accusations about the bank, then updates the city’s rules for contracting out its banking services, and requests the Mayor to sever ties with Wells Fargo when its current contract expires in 2018.

Here’s some background on the city’s soured relationship with Wells Fargo.

The accusations against Wells Fargo are listed in the “recitations” of the bill. Let’s take them one at a time.

WHEREAS, the Seattle City Council is aware of recent reports that senior management of Wells Fargo Bank (“Wells Fargo”) directed employees to fraudulently create more than 2,000,000 unauthorized bank and credit card accounts during the past five years, negatively affecting the credit ratings of millions of customers across the United States;

That’s a mischaracterization. Wells Fargo admitted in a consent decree that employees definitely created the fraudulent accounts, but with regard to who directed it,  the closest you can say to this is that federal prosecutors are investigating whether senior management directed employees to do it. Wells Fargo CEO John Stumpf denied it when testifying to Congress. Certainly there are many reasons not to trust Strumpf’s words, but nevertheless there presently is no evidence that senior management directed it.

WHEREAS, those reports indicate Wells Fargo financially benefited from these illegally created accounts and encouraged the continuation of these fraudulent practices by rewarding managers and senior executives with multimillion-dollar bonuses;

It’s true that Wells Fargo financially benefitted. The rest of the sentence suggests that the bank explicitly used bonuses for their managers and senior executives to encourage the practices, but there’s no proof of that; to the extent the practices were directly rewarded, those rewards went to the front-line employees — which still encouraged abusive practices as they reported feeling intense pressure to meet quotas — and Wells Fargo has rightfully been forced to discontinue that practice. That said, it wouldn’t be surprising if the bonus structure for managers and executives  implicitly encourages “looking the other way” by setting departmental goals and quotas. The executive who ran the division responsible for the fraudulent accounts, a 27-year veteran of the company, will leave with an accumulated $125 million in stock over her tenure there, though she is not receiving a severance payment. Wells Fargo might be able to claw some of that back from her, though to-date they have not stated that they will do that.

WHEREAS, it is also reported that senior management of Wells Fargo was aware of these fraudulent practices, with Chief Executive Officer John Stumpf admitting in Congressional testimony that he first learned about the unauthorized accounts in 2013;

True. Wells Fargo claims that the 5,300 employees implicated in the fraudulent practices were fired over several years, so the above statement should not be read to imply that Wells Fargo knew about the practice and did nothing about it — though it can be argued that since the practice was continuing they didn’t do enough.

WHEREAS, Wells Fargo has agreed to pay restitution and a total of $185 million in penalties to the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, and the City and County of Los Angeles – the largest penalties ever imposed by the Consumer Financial Protection Bureau and the City and County of Los Angeles – to settle claims related to these reports that it defrauded its customers;

True.

WHEREAS, in addition to the settlement, it is reported that Wells Fargo has terminated the employment of more than 5,300 of the corporation’s lowest-paid workers, but has not fired a single senior executive;

It’s true that they fired 5300 workers; it’s not clear they were all among the company’s lowest-paid workers. According to the Washington Post, it includes some managers. Two executives have since left: the Vice President responsible for retail banking sales, and the CEO (see my comment below about executives rarely getting “fired.”)

WHEREAS, investigations into whether Wells Fargo’s misconduct also included additional criminal or discriminatory acts are ongoing;

True, but this is just casting aspersions until actual evidence of other bad behavior is produced.

WHEREAS, Food and Water Watch reported on September 6, 2016, that Wells Fargo is one of the largest contributors to the Dakota Access Pipeline, having invested $467,000,000 in project-level loans and revolving credit, which has enabled the repression and intimidation against the nearly 200 Indian Nations, environmental organizations, journalists and other non-violent demonstrators;

Food and Water Watch, an activist organization,  did in fact claim this. But they inflate the number by folding in “revolving credit lines” to the companies that have broad uses and may not be used at all for DAPL. Also, their source for the direct investment figure is the Rainforest Action Network, which actually has no information posted on its web site about Wells Fargo’s investment in DAPL, so it’s impossible to independently verify the figure. For its part, Wells Fargo has admitted to being one of 17 investors in DAPL, though they have not given a total investment amount.

Which brings us to the heart of the matter:

WHEREAS, the Seattle City Council finds that Wells Fargo’s investment in the Dakota Access Pipeline and recent misconduct and dishonest business practices are contrary to The City of Seattle’s strong commitment to conducting its business with socially responsible banks, and sets forth a framework to ensure that The City of Seattle does not engage in business with a banking institution that has a demonstrated pattern of dishonest or unfair business practices including deceiving, defrauding, and duping its customers;

This is a perfectly fair policy statement for the City Council to make — even if you take out all the distortions and exaggerations in the prior recitations.

The body of the ordinance has five sections. Section 1 proposes to broaden the existing definition of “socially responsible banking practices,” as must be disclosed by a bank bidding to provide banking services to the city. The current definition focuses on the requirement to provide data on performance of several positive tasks, under four broad headings:

• community involvement and reinvestment;
• community banking needs;
• small business lending and community development;
• home ownership and consumer credit.

The proposed ordinance extends the requirement to also provide data on “whether they have engaged in dishonest or unethical business practices within the last five years, including but not limited to any orders findings or settlements with any public or private regulatory or disciplinary body with jurisdiction involving discriminatory, unfair, deceptive, or abusive acts or practices or applicable consumer protection laws or regulations.” The problem with this kind of requirement, as worded, is that it’s open-ended and vague; the specific list  is good, but who defines whether something else is an “unethical business practice”? This will need some clean-up in committee.

Section 2 is similar, but rather than applying to the vender selection process, it requires that similar disclosure requirements be included in the contract signed with a vendor to provide banking services.  Unfortunately, the list of what must be promptly disclosed is even worse: “any claims, settlements, pending investigations, or reasonable likelihood of claims that it has engaged in any dishonest or unethical business practices or practices that may violate any rule or regulation of a public or private regulatory or disciplinary body with jurisdiction involving discriminatory, unfair, deceptive, or abusive acts or practices or applicable consumer protection laws or regulations, and including a description of corrective action efforts, if any.” Not only is the definition of “dishonest or unethical” still up for interpretation, but vendors would be required to disclose “any claims” AND any “reasonable likelihood of claims.” Plus “pending investigations.”  So, for example, if a teller in another state is accused by a customer of dishonesty, a bank would have to report it to the City of Seattle — even it’s completely baseless. This is just a silly overreach, and again it will need to be scoped down to a reasonable request when debated in committee.

Section 3 changes the rules dealing with “debarment,” the process of preventing a potential vendor from entering into any contract or subcontract with the city. The proposed ordinance extends the reasons for debarment to include failure to comply with the socially responsible banking requirements in a prior contract.

Section 4 amends a policy previously established in a Council resolution that established that when selecting institutions to do business with, adherence to the city’s social policy takes precedence over furthering the city’s financial objectives. The policy is amended to explicitly call out fair business practices as part of that social policy.

Section 5 is really more of a resolution than an ordinance; it “encourages and requests” the executive branch to cut ties with Wells Fargo. Specifically it asks the city to:

• not renew the banking services contract with Wells Fargo when it comes up for renewal in 2018;
• undertake a competitive bidding process to select a new banking vendor,  including socially responsible banking performance as a factor worth at least 20% in the selection criteria (currently it’s 15%);
• work with Wells Fargo to enter into a “voluntary debarment agreement” for at least one year.
• refrain from conducting any new investment or other banking business for at least one year from the effective date of the ordinance.

There are a few things that one might expect to find in the bill that are noticeably absent. First, there’s no attempt to terminate the current contract with Wells Fargo early “for cause;” it runs through 2018, so one might imagine asking the Mayor to attempt to negotiate an early exit perhaps 6-12 months from now to give the city time to contract with another bank and arrange to shift its accounts over.  Second, the bill doesn’t update the required contract terms to make it easier to terminate a banking services contract based on the bank’s behavior outside its relationship with the city. Third, it doesn’t try to set the stage for moving the city’s banking business to a credit union — or to take the more radical step of establishing a municipal bank.  State law currently limits the financial institutions that can supply a city with banking services, but trying to change that law is already on the city’s legislative agenda for the upcoming session in Olympia. Perhaps Sawant and the Council staff concluded that those items were too difficult or complex to get passed.

Sawant’s bill was referred to Council member Tim Burgess’s Affordable Housing, Neighborhoods and Finance Committee, where it will get a thorough review in January. It will be interesting to see how different it looks when it emerges from committee.

 

Back in October, the Mayor and Council sent a letter to Wells Fargo withdrawing from an investment deal with the bank and asking them to explain the corrective actions they are taking to address the fraudulent practices.   A week later, Wells Fargo responded with a letter which the city hasn’t previously publicly acknowledged it received (the Mayor’s press office provided it to me tonight upon my request). In the letter, they state that they are “deeply sorry” and  describe the corrective steps they have taken. They claim they hired an outside consulting firm to perform “an extensive review of consumer and small business retail banking deposit accounts and unsecured credit cards going back to 2011.” According to that consultant, 1.5 million deposit accounts and 565,000 credit cards were flagged as “possibly unauthorized” along with  100,000 bank accounts and 15,000 credits which may have incurred unwarranted fees. They also list the corrective actions they claim the bank has taken:

• Eliminating product sales goals for the retail banking employees;
• Sending confirmation to customers when new accounts are open;
• Listing all of a customer’s accounts in their online customer-service Web site to ensure transparency;
• Issuing full refunds to customers they have already identified, and broadening their search to find any additional customers they may have missed;
• Terminating managers and employees involved in “sales practice violations;”
• Establishing an enterprise-wide Office of Global Ethics and Integrity;
• Implementing an updated Code of Ethics and Business Conduct;
• Investing $50 million for monitoring of bank locations, including increasing the staff dedicated to oversight;
• “CEO and Chairman of the Board John Stumpf has retired from Wells Fargo effective October 12, 2016.”

That last one is a bit Orwellian, though perhaps in a moment of candor as it is under the heading of “Fixing what went wrong.” Corporate executives don’t get fired; they either retire or resign to “spend more time with their family” or “pursue other opportunities.” And some of the others sound like fine things on paper, but may not be so helpful in reality; for example, eliminating sales goals doesn’t help unless the bonus system changes to ensure that it doesn’t reward an employee for higher sales. Also, many companies have an Office of Ethics that is essentially toothless; it’s meaningless unless that office can conduct independent, unobstructed investigations and has authority to sanction or even fire people because of ethics violations. Likewise, most companies have a Code of Ethics, and most of them say approximately the same thing. The difference is in what the consequences are if the code is violated. Wells Fargo is painting a picture of a humbled company trying to fix itself, but it hasn’t demonstrated (yet) that the changes are more than skin-deep. Hopefully the Mayor and City Council will continue to press on these issues to ensure that Wells Fargo is instituting meaningful reform; after all, regardless of what happens with Sawant’s proposed ordinance, the bank is still Seattle’s depository banking partner for the next two years.

 

In breaking news, yesterday federal regulators sanctioned Wells Fargo for an unrelated matter: not restructuring itself to be better able to withstand a financial shock that might lead to bankruptcy. Cutting ties is sounding better with every passing day.