Transpower’s 2003 cross-border lease over the South Island high voltage electricity grid effectively sold the $700 million grid to the Wachovia Bank of North Carolina. The sale allowed Wachovia to abuse the US tax base and for this, Wachovia paid Transpower a bribe price of approximately 5% ($34.6 million). As part of this arrangement, Transpower leased the grid back from Wachovia under a lease term of about 80 years, but with an option to repurchase the grid after about 27 years”.

“Not surprisingly, when brought to public attention, this sale of a public asset into a tax abuse scheme prompted anger. In 2009, however, Transpower reported the restructuring and partial termination of the cross-border lease and Transpower’s Chief Executive reported that Transpower was ‘essentially out of the deal’”  (Watchdog 131, December 2012, “Transpower’s Cross-Border Lease Over SI High Voltage Grid”, Sue Newberry, http://www.converge.org.nz/watchdog/31/05.html).

Transpower is the State-Owned Enterprise [SOE] which “owns” and operates the national high voltage electricity grid. Sue had previously written on this subject in Watchdog 111, April 2006 (“Foreign Investment In Transpower. What’s Going On With Our Power Transmission System?” http://www.converge.org.nz/watchdog/11/06.htm) and Watchdog 115, August 2007 (“Who Owns The South Island Grid? Trying To Find Out Is Like Peeling The Proverbial Onion”, http://www.converge.org.nz/watchdog/15/04.htm).

CAFCA members attended Transpower’s Annual Public Meeting in Christchurch in October 2012, to highlight the question of who does own the South Island power grid. They picketed outside the meeting, distributed a specially written leaflet to those attending, and Committee member Colleen Hughes asked questions of the Transpower executives. CAFCA had previously contacted the media and the result was the Press article “Fears Over Grid Are ‘History’”, by Michael Berry (19/10/12, http://www.stuff.co.nz/the-press/business/7836569/Fears-over-grid-are-history).  

OK, if this is all history, why am I bringing it up again now? Sue Newberry’s 2012 Watchdog article said: “Perhaps fortunately for Transpower, during the Global Financial Crisis Wachovia was taken over by Wells Fargo”. That being the case, Transpower can thank its lucky stars that it did get out of that disgraceful tax dodging cross-border lease when it did, because it would definitely have gone from the frying pan into the fire if it had still been “owned” by Wells Fargo.

Fraud Easy For Ordinary People To Understand

“For the enemies of big banks, it was a dream come true. John Stumpf, the Chief Executive Officer of what until recently had been the most valuable bank in the world, Wells Fargo, sat alone under the bright lights of a Senate hearing on September 20, meekly receiving a three-hour public flogging –from industry-friendly Republicans, no less. Pennsylvania’s Pat Toomey, who is up for re-election, called the bank’s behaviour ‘unbelievable’ and ‘deeply disturbing’. The Committee’s Republican Chair, Richard Shelby of Alabama, broke out Watergate language: What did Stumpf know, and when did he know it?”

“The outrage was real. On September 8, Government officials revealed that Wells had opened more than two million bank and credit card accounts for customers without their permission from 2011 through 2015, resulting in $US2.6 million in unwarranted fees for tens of thousands of unsuspecting clients. Wells – once the poster child for banking prudence – agreed to pay $US185 million in penalties, while exasperated Senate critics wondered what it would take to reform the industry. Massachusetts Democrat Elizabeth Warren offered her opinion to a visibly uncomfortable Stumpf: ‘The only way that Wall Street will change is if executives face jail time when they preside over massive frauds’”.

“Stumpf had built the bank’s much admired success on a business strategy that fostered such fraud. ‘Cross-selling’, or pushing account holders to open new accounts with Wells, was his pride and joy. On quarterly earnings calls in recent years, Stumpf had touted his company’s success with the tactic. The markets responded by boosting the company’s stock by $US30 per share. The value of Stumpf’s personal holdings jumped by $US200 million”.

“Behind the ever rising ratios of ‘products per household’, investigators found, was a boiler room* atmosphere of ‘excruciatingly high pressure’ to boost numbers. Regional bosses set daily quotas for tellers and personal bankers, requiring them to stay late and work weekends or risk being fired. One whistle-blower, Yesenia Guitron, allegedly told managers in 2008 that the pressure was driving employees to open new accounts. Wells’ management learned of the problem in 2011, according to investigators. But when the city of Los Angeles raised concerns in 2013, Wells said it didn’t give customers any accounts or services they didn’t need, the city’s deputy attorney testified”. *Boiler room: “A place where high-pressure salespeople use banks of telephones to call lists of potential investors (known as "sucker lists") in order to peddle speculative, even fraudulent, securities. A boiler room is called as such because of the high-pressure selling”. Investopedia. Ed.

“It was only after a 2013 Los Angeles Times article that the bank admitted to its regulators that there was an issue, investigators found. Over time, Wells fired some 5,300 employees and claimed to be rooting out the problem. ‘This type of activity has no place in our culture’, Stumpf testified. But the cross-selling push continued until the day of the settlement in early September (2016). Worse, even as talks were under way, Stumpf and the Bank’s Board gave a lavish retirement package to the executive in charge of community banking, Carrie Tolstedt, who walked away with $US124.6 million in stock and options”.

“Stumpf told Senators: ‘We never directed nor wanted our team members to provide products and services to customers that they did not want’. The Justice Department has reportedly issued subpoenas and begun a criminal probe. US federal prosecutors are vying for the right to go after the bank, and the Office of the Comptroller of the Currency is weighing penalties for managers. Democratic staffers on the Hill have discussed the unlikely prospect that special powers could be triggered, allowing regulators to break up Wells”.

“Meanwhile, Republican staffers and their allies at other banks are as angry at Wells as anyone. They say the revelations, coming amid the current populist atmosphere, have at least temporarily derailed efforts to roll back the Dodd-Frank Act, which imposed new oversight rules on Wall Street. As for rolling back bad behaviour there, says Richard Cordray, head of the powerful but politically embattled Consumer Financial Protection Bureau, which imposed $US100 million of the federal fine on Wells, ‘it’s a big project to change the culture at the banks’”.

CEO Resigned October 2016

As Time said in a subsequent article (12/10/16, “Why The Wells Fargo Scandal Really Matters [Hint: It’s Not Just the Fraud]”, Rana Foroohar, http://time.com/4529054/stumpf-wells-fargo-fraud/?iid=sr-link1): “This scandal is a canary in a still very dangerous coal mine.  I always thought John Stumpf, the now former CEO of Wells Fargo would eventually step down amid revelations that bank employees opened millions of credit card accounts customers hadn’t approved in order to hit profit targets”.

“Let me be clear: I didn’t think he’d resign because the behaviour under his watch was egregious - that hasn’t stopped any number of other financial executives from staying in their posts. But rather, I thought he would fall because the fraud in this case was just so easy for average people to understand. Spliced and diced derivatives contracts sold across borders to gullible counterparties? Huh? But straight up fraud - taking customers’ personal information and using it without their knowledge or consent - that’s something everybody can understand. And be justifiably outraged by”.

“Wells’ easily grasped misdeeds, and the fallout, come at a pivotal time for the reform-minded. I’m hopeful this scandal, which doesn’t require the cleverness of Margot Robbie in the tub* to explain, represents an opportunity to reconstruct and refresh the narrative around our financial system. Particularly what still needs to be done to make it safer. Officials did a great job saving the financial system post 2008, but a terrible job reregulating it and putting it back in service to the real economy”. *This was one of the more memorable scenes in the excellent movie “The Big Short”, about who and what were responsible for the Global Financial Crisis. It was reviewed by Jeremy Agar in Watchdog 141, April 2016, http://www.converge.org.nz/watchdog/41/12.html. Greg Waite reviewed the book in Watchdog 131, December 2012, http://www.converge.org.nz/watchdog/31/12.html. Ed. 

Nothing Has Changed

“The Wells case is a perfect example. Why was the malfeasance at Wells in the credit card division? One reason is that Dodd-Frank put certain restrictions on the ability of banks to make money via riskier trading. But absent deeper changes in the business model of finance, banks didn’t take this as an opportunity to channel capital to more productive uses (like, for example, the sort of business lending that made up the majority of their revenue stream 40 years ago). Rather they looked for another place to make a quick buck - this time in consumer debt”.

“All this is, of course, encouraged by policymakers who are all too eager for constituents to have access to debt to paper over the fact that the recovery is still sluggish, and wage growth has been slow. Wells is only one of any number of banks that have moved into the consumer retail business as a way to try to keep profit margins high. Given the pressure to make the quarterly numbers, but no real culture or mission change, it’s no wonder things turned sour”.

“What’s the solution? While I think that the Consumer Financial Protection Bureau and other watchdogs are doing God’s work, I also think it’s nearly impossible to try to catch and prosecute, post-facto, all the bad things that banks might be doing. Smart regulation is important, but I think we need to go deeper and flip the current paradigm on its head. Instead of waiting to see what new trick an industry that takes a quarter of all corporate profits but creates only 4% of all American jobs will do, let’s ask the financial industry, a sector that has nothing but metrics at hand, to produce some numbers on what parts of its business model have clear, measurable social value”.

“Smart lending to worthy businesses (particularly the small and midsize businesses that can’t raise capital on the public markets) would rank high. Issuance of fake credit cards? Not so much. London Whale*-type trading? Definitely not. The financial sector is supposed to serve business and the public - not the other way around. The Wells saga is a shockingly simple example that we’re not there yet”. *London Whale was the nickname given to the trader at the London branch of transnational investment bank JP Morgan. This individual was deemed to be responsible for the bank losing billions of dollars in 2012 trades of exotic financial instruments, specifically credit default swaps. He was given that nickname because of the huge size of the losses. Ed.