CHICAGO — Fallout from the Wells Fargo phony accounts scandal has reached Midwest bond borrowers, with Illinois announcing bans on bond and investment work and the Chicago City Council set to consider a moratorium on any bond-related business.
Wells Fargo Securities had made the 15-member pool of senior managers Illinois announced in August but over the weekend Gov. Bruce Rauner's administration said it won't include the firm in a deal "until further notice."
"The Rauner administration has not done any bond business with Wells Fargo to date, and the administration previously chose not to do business with Wells Fargo on the current bond deal that is in progress," an administration source said. Wells Fargo Securities was in the state's previous pool and was senior manager on a $750 million state general obligation bond sale in May 2014.
The state did not set a rotation for the new pool announced in August.
The Wells Fargo parent bank has been on the hot seat, with federal prosecutors investigating sales practices after revelations that thousands of its employees secretly created accounts without clients' approval and other high profile issuers suspending work with the firm. The Consumer Financial Protection Bureau recently fined Wells Fargo $185 million over 2 million bank and credit card accounts that customers may not have authorized.
On Monday, Illinois state Treasurer Michael Frerichs announced a one-year moratorium on his office's use of the firm as broker-dealer for short-term investment activities and a suspension of investments in all Wells Fargo debt securities.
Details of the scandal "require a strong response," he said. "We will not reward companies that irresponsibly open new bank accounts and improperly repossess vehicles of members of our armed forces."
The office conducts about $1 trillion in investment transactions annually of which Wells Fargo has handled roughly $30 billion. Wells Fargo is one of about 25 firms the state uses. Frerichs said he could not put a total dollar amount on Wells Fargo's fees from the business since it's part of the transaction that is bid, but he said the firm would lose out on "millions of dollars" because of the lost business.
After the one-year ban, the office will review Wells Fargo "corporate governance" and whether it has put "sufficient internal controls in place" to avoid future problems and decide on whether to resume business with the bank.
Later Monday, Wells Fargo countered Frerichs' assessment that the bank would lose out on "millions" of fees. "Respectfully, the actual amount in lost revenue for the company from business conducted with the Illinois Treasurer's office is approximately $50,000 per year," the bank said in a statement.
Frerichs said his office would also audit contracts with the bank and he is encouraging the state pension investment board to consider a ban.
In Chicago, the powerful Finance Committee that holds sway over approval of city bond deals will consider on Wednesday an ordinance submitted by committee Chairman Edward Burke that would ban most financial business by the city Finance Department, comptroller, and treasurer's offices with Wells Fargo for two years.
"The city council should not engage in any business for the next two years with this institution that has deceived, defrauded and duped its customers," Burke said in a statement. Aldermen Roderick Sawyer and Raymond Lopez are co-sponsors.
The firm would lose out on city bond business, work as a municipal depository, work as a trustee in any loan or redevelopment agreement, brokerage work on city investments, and financial advisory work.
The ordinance also encourages the city's pension funds to divest all of their investments with Wells Fargo Bank and any of its subsidiaries. The firm has collected $19.5 million in fees for city related work over the last decade, according to the committee.
"The administration supports the city not entering into any new business arrangements and ceasing all current business with Wells Fargo for the next 24 months. If this ordinance is passed, we will move to terminate the few remaining deals the city has with Wells Fargo as long as we are legally able to terminate the transactions and termination does not negatively impact Chicago taxpayers," finance spokeswoman Molly Poppe said.
The bank has unofficially been in the penalty box with the city which has not used Wells Fargo Securities as a senior manager since it refused to lower the rating threshold for three swaps after termination events were triggered by downgrades in 2015. Wells Fargo did not demand immediate repayment and the city eventually paid off the swaps.
"We certainly understand the concerns that have been raised," Wells Fargo said in a statement "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 the state's and city's trust.
"Wells Fargo has diligently and professionally worked with the state of Illinois and the city of Chicago since 1970 to support the government and people of the state and city. We manage their business in our government & institutional banking division, which is separate from our retail bank," the bank said in a statement.
The Finance Committee said a good portion -- $16 million — of the bank's Chicago fees came from providing credit enhancement on a 2002 general obligation note sale, 2005 airport commercial paper issuance, and a 2004 airport refunding.
Another $2 million came from fees for serving as a senior manager on city bond deals in 2005, 2011, and 2014. About $665,000 came from fees as a co-senior manager on deals in 2006, 2010, and 2012 and $210,000 as a co-manager on deals in 2010 and 2013. The remainder came from work as a trustee on various transactions and escrow or paying agent.
"Perhaps these actions will send a loud and clear signal to Wells Fargo that in our eyes, their punishment for these misdeeds was not enough given the scope of the fraud in which they engaged," Sawyer said.
The action in Illinois follows statements from New York City officials that they might cancel business with the bank and moves by other major issuers to penalize the firm. New York's Metropolitan Transportation Authority left Wells Fargo Securities off its new rotation of senior managers pending a "responsibility review" of the bank's practices.
California Treasurer John Chiang suspended the bank from underwriting state bonds and other state business for a year, and Connecticut Treasurer Denise Nappier added Morgan Stanley as co-bookrunning manager alongside Wells Fargo for an October GO bond sale.
In Chicago, Treasurer Kurt Summers, who manages the city's $7 billion short term investment portfolio, pre-emptively acted ahead of the city council Finance Committee announcing Monday he would divest of $25 million in city treasury holdings from the bank as expeditiously as possible "in a fashion that is prudent and will protect taxpayer money."