CHICAGO – Chicago penalized Wells Fargo on two fronts Wednesday over its phony accounts scandal.
The City Council approved a one-year ban on doing bond and other financial business with the bank, and the finance department announced it was moving $1.9 billion of trustee business to another bank.
"I think that what this does in addition to specifically directing a ban on Wells Fargo doing business with the city of Chicago," it establishes a public policy "that this kind of conduct by a huge financial institution in America simply cannot take place without some implications, negative implications, with municipalities that have done business with it in the past," said Alderman Edward Burke, chairman of the council's Finance Committee and lead sponsor of the measure.
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.
California and other high-profile borrowers have announced moratoriums on deals with Wells Fargo Securities or removed the bank from pending deals. Illinois Gov. Bruce Rauner's administration said Monday it would not use the bank, a member of the state's senior manager pool, until further notice, and the Illinois treasurer on Monday suspended investment work with the bank.
The ordinance approved Wednesday bans most financial business by the city Finance Department, comptroller, and treasurer's offices with Wells Fargo for one year. 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 underwriting bond deals, serving as a trustee, or escrow or paying agent, and providing credit enhancement provider over the last decade, according to the committee.
Mayor Rahm Emanuel's administration endorsed the ordinance earlier in the week and at the Finance Committee meeting prior to the full council vote chief financial officer Carole Brown announced that the city was moving to strip Wells of its role as trustee on various GO issues. The city is able to make the change under the bond indentures.
It's moving the work to a minority owned Seaway Bank headquartered on the city's south side.
Wells Fargo voiced disappointment with the action and stressed that the misconduct did not stem from its government business, which is separate from it retail operations.
"Wells Fargo is disappointed that the Chicago City Council has chosen to suspend a relationship with one of the nation's safest and strongest financial institutions at a time when the city needs access to dependable financial partners," a statement said.
The firm said since 2006, it had underwritten $4.7 billion of debt issued by the city and its sister agencies including nearly $1.6 billion as senior manager. The bank is also know highlighting its not-for-profit and community contributions.
The city has other existing contracts with the bank that are more difficult to attempt to extract itself from, and therefore likely will be left in place, officials said.
The bank provides a letter of credit on 2004 Midway Airport bonds and is a swap counterparty on a notional amount of $52 million of a $131 million 2004 Midway series. The swap is negatively valued at $16 million. The city's only remaining swaps are on airport debt after it shed GO and other revenue bond swaps over the last year.
Wells Fargo also serves as a remarketing agent on a 2008 housing deal.
Earlier in the week, city Treasurer Kurt Summers, who manages the city's $7 billion short term investment portfolio, announced his office would divest of $25 million in city treasury holdings from the bank.
The bank was already unofficially in the penalty box with the city; it has not used Wells Fargo Securities as a senior manager after 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.
Also Wednesday, the council added $25 million to a previously approved billion-dollar new money and refunding GO issue slated to sell later this year. The additional borrowing would cover the costs of new police vehicles needed for additional police officer hires that the city plans.
