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Wells virus

6 October 2016 By Gina Chon

Wells Fargo has robbed banks of a Washington standard-bearer. Big lenders had hoped to piggyback off their rival’s lack of Wall Street taint to resist proposals to curb pay and ban merchant banking. But the fake-accounts scandal weakens Wells Fargo’s ability to lead the charge.

Big banks have of late been looking to do battle on several regulatory fronts after cooling their heels for a while. One proposal they want to defeat would force senior officials to defer more than 50 percent of their pay for four years if their bank loses money after taking excessive risk.

The scandal over Wells Fargo’s opening some 2 million potentially fake bank and credit-card accounts, though, has actually added to calls for harsher action. On Wednesday several lawmakers called in a letter for stronger rules to claw back executive compensation.

The industry has also been preparing to repel watchdogs’ recent surprise recommendation to Congress to repeal banks’ ability to engage in merchant-banking activities. The Federal Reserve and other regulators reckon such private-equity-like investments can be risky.

Wells Fargo was to be held up as a decent bank that would be hurt by such new limits – until its accounts fiasco blew up last month.

The bank’s effective neutering as a bulwark against new regulation is a big blow to the industry. With its $1.9 trillion balance sheet, Wells Fargo may be systemically important, but its small Wall Street presence allowed it to avoid virtually all the fiascos that have bedeviled its peers since the financial crisis.

JPMorgan boss Jamie Dimon initially took the lead in arguing against what the industry regarded as excessive regulation in the wake of the Great Recession. But when his bank lost $6 billion on derivatives trades in 2012, he was effectively silenced for a while. Wells Fargo’s Chief Executive John Stumpf almost by default took on some of the load.

The Wells scandal and Stumpf’s dismal performance in front of Congress to explain it now leave the industry scrambling to get off the regulatory back foot again. With the London Whale losses now four years behind him, Dimon may return to the hot seat.

 

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