The night before Janet Yellen stepped down as Federal Reserve chair in February 2018, she shocked Wall Street by delivering a crushing blow to America’s most messed-up bank.
In its final official act, the Yellen-led Fed imposed unprecedented growth restrictions on Wells Fargo – tough penalties that the scandal-ridden bank has never recovered from.
Yellen’s decision to put a first-of-its-kind asset cap on Wells Fargo sent a powerful message to the rest of Wall Street that resonates even louder today as she is poised to become the nation’s first female Treasury secretary in the Biden administration. If confirmed by the Senate, Yellen will lead a team of regulators charged with safeguarding the financial system and punishing bad actors.
The former Fed chief’s tough stance on Wells Fargo shows she’s not afraid of taking on big banks, making her a hero of some on the left.
“Bringing the hammer down on Wells Fargo as she was walking out of the Fed was not only the right thing to do, but it bolstered her standing with pro-regulation progressives,” said Isaac Boltansky, director of policy research at Compass Point Research & Trading.
And in citing Yellen as an “outstanding choice” for Treasury secretary, Elizabeth Warren referenced the Wells Fargo punishment.
“She is smart, tough and principled,” Warren tweeted. “As one of the most successful Fed chairs ever, she has stood up to Wall Street banks, including holding Wells Fargo accountable for cheating working families.”
The endorsement from Warren is critical, because many on the left had been hoping President-elect Joe Biden would tap her over Yellen for the Cabinet post.
‘Pervasive and persistent misconduct’
The early 2018 Fed statement announcing the Wells Fargo asset cap used unusually colorful language, slamming the bank for “widespread consumer abuses and compliance breakdowns.”
At the time, Wells Fargo was still reeling from its admission that employees created millions of fake bank and credit card accounts to hit wildly unrealistic sales goals. That’s in addition to the hundreds of thousands of Wells Fargo customers who were forced into unneeded auto insurance. Wells Fargo also charged mortgage borrowers undue fees and was sued by small business owners who said the bank used deceptive language to dupe mom-and-pop businesses into paying early termination fees.
The Fed voted 3-0 in favor of growth restrictions that prevented Wells Fargo from getting any bigger than $2 trillion in assets.
“We cannot tolerate pervasive and persistent misconduct at any bank,” Yellen wrote in the statement.
Wells Fargo assured shareholders it expected to get 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 into profits by limiting the bank’s ability to make loans. Wells Fargo is also spending heavily on compliance, customer refunds, lawyers and technology to reassure skeptical regulators.
Wells Fargo’s share price got crushed
Just look at the damage done to Wells Fargo’s (WFC) share price, which dropped a staggering 56% since the asset cap was imposed. By comparison, rival Bank of America’s (BAC) share price has barely budged since then. JPMorgan Chase (JPM), the nation’s largest bank, is up 6% over that time span.
In short, Wells Fargo shareholders were crushed by the Fed penalties.
“The asset cap really crimped Wells Fargo’s strategic ambitions,” said Patricia McCoy, a Boston College law professor and former official at the Consumer Financial Protection Bureau. “Here we are years later, and the asset cap is still on. It sends a very strong message.”
(Wells Fargo CEO Charlie Scharf, who joined the bank nearly two years after the asset cap was imposed, applauded the “historic nomination” of Yellen and pledged to work with her.)
On Wall Street, a sigh of relief
And yet Wall Street seems just fine with Yellen as Treasury secretary. US stocks continued their post-election surge after the Yellen pick was reported.
“Dr. Yellen is certainly the right person – exactly the right person, actually – for the Treasury secretary job,” Nicholas Colas, co-founder of DataTrek Research, wrote in a note to clients. “Investors should welcome her nomination.”
If anything, her appointment may have helped Wall Street dodge a bullet.
“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) were passed over,” Brian Gardner, Stifel’s chief Washington policy analyst, wrote in a note to clients this week. Biden “is leaning towards establishment types and mostly avoiding progressives who might spook financial markets.”
In July, former Democratic Congressman Barney Frank told CNN Business it would be a “mistake” for Biden to go with Warren at Treasury.
“The financial institutions are very negative about her,” Frank said, adding that such a view is unfair. “If you have someone who is that much opposed by the people being regulated, it doesn’t work smoothly.”
No ‘rampage’ of regulation from Yellen
Yellen is expected to approach the regulation and enforcement at Treasury 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 official. “But she understands that overregulation is a drag on the economy. I don’t see her being on a rampage to just willy-nilly aggressively regulate.”
As Treasury secretary, Yellen would chair the Financial Stability Oversight Council, a team of US regulators that responds to emerging risks in the financial system.
Yellen also could use her new role to prevent banks from returning too much cash to shareholders during the pandemic. In April, she urged US regulators to ask banks to suspend dividends and stock buybacks to ensure they have enough cash to deal with the crisis. The Fed later halted bank buybacks and put some caps on dividends, though it did not force lenders to scrap dividends altogether
Under current Treasury Secretary Steven Mnuchin, FSOC has played a much smaller role, much to the dismay of Democrats. FSOC is no longer designating large nonbanks for extra oversight and Mnuchin even dismantled the council’s research staff.
“They’re not even monitoring systematic threats,” said McCoy. “We’re going to see that turn around under Yellen.”