Category Archives: Global Banking

Take Us For A Ride

Poor John Stumpf. For the past two weeks, members of Congress have been bashing him mercilessly in his role as the Chairman and Chief Executive Officer of Wells Fargo. He’s been threatened with dismissals, massive fines, and even criminal prosecution.

But why? Did his bank really do anything more odious than the other global banks? Given the multitude of complex schemes that these banks have perpetrated recently, what did John Stumpf and Wells Fargo do to deserve such repudiations?

Their scheme was actually a simple one, but it involved thousands of bank employees acting illicitly for many years. When new customers applied to open new accounts, the employees opened those accounts for them. But then the employees opened secret secondary accounts, and never told the new customers about the duplicate ones.

The customers used their primary accounts, and remained unaware that the secret secondary accounts even existed. Although the secondary accounts began with zero balances, they inevitably accrued maintenance fees and became overdrawn. In some instances, the overdrawn accounts were reported to credit agencies, which then downgraded the credit reports, ratings, and scores of the unwitting customers.

Why did thousands of employees engage in this behavior? Because Chairman and CEO John Stumpf was heavily promoting the principle of “cross selling.” In other words, the employees were presented with sales quotas and financial incentives to sell as many products and services to customers as possible.

Without, apparently, implementing the internal controls that might have guarded against the opening of fraudulent accounts.

The ire of the members of Congress was further stoked by the finding that Stumpf was warned about the illegality of the practice by internal staff, and yet allowed it to continue unabated. And he recently permitted Carrie Tolstedt, a senior executive with direct responsibility for the fraudulent activity, to retire with a nest egg that may be worth as much as $125 million.

So what is poor John Stumpf to do? What example can he emulate while dealing with government officials who are furious that Wells Fargo accepted a huge federal bailout during the financial crisis, and is now repaying that generosity with such illegal behavior?

Perhaps he should look outside the banking industry and consider how the leaders of the American automobile industry handled their own inauspicious moment before the United States Congress. In late 2008, they were briefly excoriated when they traveled to Washington DC in their private corporate jets to ask for federal bailout funds.

That’s like driving up to a soup kitchen in a luxury sports car and then asking for a free bowl, isn’t it? The American people and their Congressional representatives were incensed by the action.

But the automobile executives quickly learned from their mistake. The next time they traveled to Washington to testify before Congress, they made strikingly different travel arrangements.

What did they do? They took a road trip! They drove fuel efficient American made vehicles and touted their plans to build affordable and environmentally friendly cars.

The result? The automobile bailout was approved, in a bipartisan manner, without rancor. Although the automobile industry has continued to generate controversies, it has escaped the intense criticism that has stalked the global banking industry since its crisis-era bailout.

And thus there is a lesson that John Stumpf might learn from the automobile industry. Namely, if you’re accused of taking American citizens for a ride in a pejorative sense, why not take ‘em for a ride in a more positive sense? Why not identify a product or service that all Americans could support with enthusiasm? Then invest some of the Bank’s sizable financial assets in it, and find an engaging way to tout its public benefits.

Market analysts may complain that such a strategy may hurt the market valuation of Wells Fargo if the investments don’t yield sufficient financial returns. But considering the billions of dollars that other global banks have paid to settle charges of misbehavior, aren’t such socially beneficial investments worth the risk?

Is The Global Economy Rigged?

Although the Republican Presidential primary has now effectively concluded with the presumptive nomination of Donald Trump, the Democratic Party is still witnessing a slugfest between Hillary Clinton and Bernie Sanders. And for Sanders, that means a continuing stream of opportunities to declare that the global economy is rigged in favor of the international banks.

But is that true? Is the entire global system of governmental regulation designed to protect big lenders? And to beat up on small borrowers?

Last week, mixed evidence emerged from the European Union’s PIGS economies (of Portugal, Ireland, Greece, and Spain) in regards to this question. Although the Greek federal government received support for negotiating favorable terms on its borrowings, individual debtors on the Iberian peninsula fared more poorly.

So what of Greece? Well, the International Monetary Fund (IMF) decided to advocate for a very lenient restructuring of its federal debt. According to the IMF, Greek repayments should be delayed until the year 2040, and should then be stretched out until the year 2080.

2040 to 2080? Under such an agreement, debt repayments wouldn’t even begin for the next 24 years, and wouldn’t end for another 64 years. In a world where a 30 year property mortgage is considered a long term loan, a debt amortization schedule of 64 years would be extremely favorable to any borrower.

Meanwhile, individual Spanish and Portuguese borrowers are pushing hard to force banks to pay them interest on their mortgage loans. Because variable interest rates have dropped below zero in those nations, these borrowers are arguing that interest payments should flow from lenders to borrowers, instead of the customary reverse direction.

And how are their governmental officials reacting to their demands? Not very favorably. Although banks in Denmark have begun paying interest to their borrowers under similar circumstances, government officials in Spain and Portugal are asserting that no mortgage rate should ever fall below zero. In other words, even when commonly accepted market indicators of interest fall into the negative range, the officials are declaring that lenders should never pay interest to borrowers.

Thus, on the one hand, a relatively small debtor nation like Greece can now look forward to some relief from the global banks. But on the other hand, tiny, individual borrowers in small nations like Spain and Portugal are being treated differently.

So is the international banking system rigged against the proverbial little guy? In Europe, apparently, the answer appears to depend on the relative size of the little guy. Small nations like Greece often borrow relatively large amounts of money; they appear to be enjoying some protection.

But individual mortgage borrowers? No such luck. As noted by Bernie Sanders, the system may indeed be arrayed, if not rigged, against them.

Do We Need An Export-Import Bank?

Mortgage fraud at the Bank of America. Interest rate manipulation at Barclays Bank. Money laundering at HSBC.

We’ve seen quite a few global banking scandals sweep across the news during the past few years, haven’t we? And just last week, another controversy erupted at the Export-Import Bank of the United States.

Huh? The Export-Import Bank? That’s not exactly a household name, is it?

The Ex-Im Bank is actually a government agency that was established during the Great Depression to help American manufacturers sell products to foreign customers. When such customers are unable to independently secure loans to buy American goods, the Ex-Im Bank is chartered to step in and guarantee their debt.

Sounds innocent enough, doesn’t it? But the Ex-Im Bank has gathered its share of controversy lately, and certain leading American legislators have called for its dissolution. They have asked, for instance, whether it’s hypocritical to complain about foreign governments that subsidize their national airlines when the Ex-Im Bank gives similar support to Boeing, a seller of aircraft to some of those very airlines.

Interestingly, such debates about the need for national banks extend back to the earliest days of the United States. Although many know that it was Alexander Hamilton, America’s first Treasury Secretary, who championed the creation of the First Bank of the United States, few know that that particular bank was disbanded after a mere twenty years.

And then, after a Second Bank of the United States was created to manage the federal debt that was incurred to fight the War of 1812, President Andrew Jackson led a successful fight to disband it after another twenty year period.

In fact, for much of the 1800s, the United States had no national bank at all. It was only after the great bank Panic of 1907, a crisis that may have led to an economic catastrophe if not for the herculean efforts of J.P. Morgan to save the national financial system, that the United States finally established today’s permanent Federal Reserve Bank system.

On the one hand, despite occasional calls by American politicians to “audit” the Fed, very few individuals today support the disbandment of the national bank of the United States. But on the other hand, many do call for the dissolution of various dysfunctional governmental and quasi-governmental banking institutions.

For instance, the mortgage institutions Fannie Mae and Freddie Mac required massive federal bailouts to prevent the Great Recession of 2008/09 from evolving into a second Great Depression. And just last week, the public learned that government officials at the Ex-Im Bank permitted Boeing executives to write the very regulations that bind them.

Nevertheless, such undeserved bailouts and corporate cronyism merely extend a longstanding tradition at America’s governmental banking organizations. After all, it was Andrew Jackson who once declared that “it is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes” while he was abolishing the Second Bank of the United States.

Thus, it wouldn’t be surprising if the latest Ex-Im Bank controversy explodes into another global banking scandal. And yet, if history is any guide, even the outright abolishment of the Bank will not end the federal government’s direct presence in the banking industry.