LOS ANGELES — California's treasurer blocked Wells Fargo from bond underwriting and other business relationships, as shockwaves from a fake accounts scandal in the company's retail bank rocked the fifth-largest municipal underwriter.
"Sometimes, enough is enough," Treasurer John Chiang said at a press conference Wednesday in San Francisco.
He said Wells Fargo will be suspended for a year as a managing underwriter on negotiated state bond sales where the treasurer picks the underwriter, as a broker-dealer for buying investments for the treasurer's office, and that the office wills suspend investments in Wells Fargo securities.
Wells Fargo Securities had been slated to price the California State Public Works Board's $527.54 million of lease revenue refunding bonds, the biggest municipal deal of the week, before it was delayed on Tuesday.
"Just yesterday I replaced Wells Fargo as the underwriter on two major state bond issues," Chiang said at Wednesday's press conference.
Loop Capital Markets LLC and Raymond James & Associates, Inc. have been named joint senior managers for the Public Works Board deal, according to Deputy Treasurer Tim Schaefer.
"How can I continue to entrust the public's money to an organization which has shown such little regard for the legions of Californians who have placed their financial well-being in its care?" Chiang said.
The treasurer's office did not release the substitute underwriters on the two series of floating rate bonds, because they had not been notified yet they are being elevated into senior manager slots. Loop and Raymond James are the underwriters on the fixed rate portion of the bonds, Schaefer said.
"We could be back in the market as early as next week on the fixed-rate bonds," Schaefer said. "But, don't hold me to that, because it depends on how long it takes the underwriters to put the marketing books together."
On the floating-rate series, the state should be back in the market in two weeks on one of the floating rate series, and the second part could come in three weeks.
The sanctions against Wells Fargo take effect immediately and will remain in place for the next 12 months.
Chiang also said he will work with the California Public Employees' Retirement System and the California State Teachers' Retirement System to pursue governance reforms at Wells Fargo. The two pension systems combined have over $2.3 billion invested in Wells Fargo fixed-income securities and equities.
Chiang said he will seek separation of the chief executive and chair positions at Wells Fargo; appointment of a consumer ombudsman or confirmation that such a position exists, with detailed information on the position's authority and role within the organization; development of an anonymous ethics reporting process and whistleblower protection program; a review of Wells Fargo's compensation practices; and "clawbacks" of ill-gotten compensation for executives most directly linked to Wells Fargo's deceptive and predatory sales practices.
Federal prosecutors launched a preliminary inquiry into sales practices at parent Wells Fargo after revelations that thousands of its employees secretly created accounts without clients' approval.
The Consumer Financial Protection Bureau fined Wells Fargo $185 million in penalties earlier this month for allegedly creating 2 million bank and credit card accounts that may not have been authorized by customers.
The fallout from the scandal first spread to Wells' municipal underwriting business earlier this week. On Monday, New York's Metropolitan Transportation Authority put its business with Wells Fargo Securities on hold pending a review of the bank's practices.
The MTA has sold over $4.5 billion of securities this year, according to Thomson Reuters.
MTA's decision on Monday was not a factor in the actions California took, Schaefer said. Chiang had been contemplating what action to take ever since the news broke about Wells Fargo's transgressions.
"The treasurer likes to make decisions with lots and lots of data," Schaefer said. "We were actively talking about Wells Fargo [the day the news broke.] We spent the next four or five days gathering data to make sure if he did this, the taxpayers wouldn't be harmed, because of reduced competitiveness on the state's notes and bonds."
Schaefer said the fact MTA "did what it did on Monday was in all candor a complete coincidence. We would have done this last week, but given the way he decides things, it was appropriate."
California is one of the biggest state issuers of municipal bonds in America. So far this year, the state had sold over $7 billion of debt.
"Wells Fargo has diligently and professionally worked with the state for the past 17 years to support the government and people of California. Our highly experienced and proven government banking, securities and treasury management teams stand ready to continue delivering outstanding service to the state," Gabriel Boehmer, spokesperson for Wells Fargo. "We certainly understand the concerns that have been raised. We are very sorry and take full responsibility for the incidents in our retail bank. We have already taken important steps, and will continue to do so, to address these issues and rebuild your trust."
Wednesday's action is just the latest attempt by Chiang to tie bank underwriting assignments to ethical standards.
He announced policies July 27 designed to limit what he called questionable municipal bond industry bankrolling of local bond election campaigns.
Chiang has asked all finance firms that wish to participate in the sale of state issued bonds to sign certificates by the end of August pledging to not engage in what Chiang described as pay-to-play practices related to bond measure campaign funding.
Chiang, a Democrat, is running for governor in the 2018 race to succeed Jerry Brown, who can't run again because of term limits.