For Wells Fargo investors, the Federal Reserve's imposition of a timeout on growth at the bank was just one more grim development. The bank is being penalized after employees created millions of unauthorized customer accounts and charged borrowers for unneeded auto insurance.
Yet, the penalty, which gave the lender's stock its worst drop in at least four years, could actually boost President Trump's broader push to loosen regulations that he says have curbed growth.
By showing that financial regulators are willing to take punitive measures when needed, the Fed's sanction deprives deregulation's opponents of ammunition, said Jaret Seiberg, an analyst with Cowen Washington Research Group. Democratic lawmakers, including Sen. Elizabeth Warren of Massachusetts, had pushed the government since at least late 2016 to take stronger action against the San Francisco-based lender after well-publicized scandals involving consumers that — unlike rigging currency-exchange rates, for example — were all too easy for Americans outside of the industry to grasp.
The Fed capped Wells Fargo's assets at the $2 trillion it held at the end of last year until executives demonstrate an improvement in corporate oversight. It wasn't just harsh, it was unexpected, Seiberg said in a report.
Critics who had maintained that the bank's $100 million settlement with the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency over the fake accounts was insufficient to deter future bad behavior had been growing less strident, he wrote, which gives the Fed "even more political credit for acting, as it really was no longer under pressure."
And since the announcement was made on former Chair Janet Yellen's last day in office, her successor, Jerome Powell, can start his tenure talking about the Fed's assertiveness rather than fielding questions about its inaction. Warren, who had repeatedly urged Yellen to use the Fed's power to remove Wells Fargo directors, praised the measure, which came in tandem with Wells' announcement that it would replace four board members before the end of the year.
"The company has repeatedly behaved in an unacceptable manner towards its customers," Yellen said in a letter to Warren detailing the Fed's actions. "We are focused on ensuring that the firm addresses the root causes of these breakdowns."
The Fed's decision "demonstrates that we have the tools to rein in Wall Street if our regulators have the guts to use them," Warren said in a statement afterward.
Showing lawmakers and voters alike that authorities "are willing to take harsh actions against megabanks for misdeeds is critical in building and maintaining political support for bank deregulation," Seiberg wrote.
Former President Barack Obama's administration, for instance, was haunted by then-Attorney General Eric Holder's statements in 2013 that prosecuting extremely large banks was difficult since it might cause disruptions to the broader financial system.
To prove that lenders weren't "too big to jail," the Obama team had to remain tough on banks through the end of the president's term, Seiberg said. The Fed's action keeps "President Trump's team from being burdened with the same problem," he added
It's a particularly thorny issue in the wake of the 2008 financial crisis, when the public chafed as large corporations were given billions of dollars in bailouts while many voters lost their jobs as unemployment spiked to 10 percent or were forced out of foreclosed homes.
While some reports have described the Fed's action against Wells Fargo as unprecedented, the central bank did impose a similar restriction on New York-based Citigroup in March 2006, he said. The Fed, then chaired by Alan Greenspan, ordered the lender not to make any major acquisitions following its purchase of Texas-based First American Bank until it improved its compliance risk management.
Because no similar restrictions have been placed on banks since, the Fed's action seems "extra tough," and the central bank's willingness to take it may increase the odds that a compromise deregulation bill in the Senate Banking Committee, chaired by Idaho Republican Sen. Mike Crapo, becomes law.
The proposal raises the size at which banks are deemed systemically important, or big enough to threaten the financial system if they were to fail as Lehman Brothers did, from $50 billion in assets to $250 billion.
Such companies are subjected to heightened oversight to avoid a recurrence of the financial crisis, and the industry has argued that current threshold is so low that it affects lenders who don't pose a significant risk.
The bill addressing that concern is premised, in part, "on the idea that regulators will properly police big banks even if they are not deemed systemically important," Seiberg wrote. "Imposing the growth restriction on Wells Fargo is a pretty clear signal from the Federal Reserve that it is willing and able to act."
Wells Fargo, for its part, is committed to addressing the Fed's concerns, CEO Tim Sloan promised investors after the decision was announced. Delivering on that may prove crucial for the bank's stock.
Its investors, who already suffered sharp losses in the immediate aftermath of the bank's settlement with the Consumer Financial Protection Bureau, never reaped the same benefits of the industry's later surge as those in rivals from JPMorgan Chase to Bank of America and Citigroup.
JPMorgan, the largest U.S. lender by assets, climbed 61 percent from Trump's election through early February, amid bets that he and a Republican Congress would curb regulations, while Bank of America gained 84 percent and Citi rose 50 percent.
Wells has added only 26 percent in the period, and Sloan's concession that the Fed's restriction would curb the lender's profit by as much as $400 million this year pushed the stock down another 9 percent on Feb. 5, the first trading day after the announcement.
After reviewing its own conduct in the wake of the September 2016 settlement, the lender conceded that more than 3 million unauthorized accounts had been created over a five-year period by low-level workers under pressure to sell as many as eight different products to each household or risk losing their jobs.
Along with the bogus accounts, Wells Fargo has acknowledged a regulatory probe of its mortgage business and conceded that some car-loan customers were charged for insurance they didn't need.
The bank has made significant changes, however, since Sloan took over from John Stumpf, who abruptly retired amid the fake accounts scandal. Wells Fargo has overhauled the pay structure in its large community banking division, split the roles of chair and chief executive officer, and cut incentive pay for the former CEO.
Analysts at debt-ratings firm Moody's noted those shifts when they maintained Wells Fargo's credit score of A2, midway between the highest grade and junk, but they still cut the company's outlook to negative from stable on Feb. 6.
"The operational effectiveness of Wells Fargo's governance and risk-management changes is mostly untested," Allen Tischler and M. Celina Vansetti-Hutchins wrote.
Additionally, the public nature of the Fed's action "adds to the reputational head-winds that the firm has endured over the past year and a half," they wrote. That increases the risk that the lender will lose customers and "further undermines Wells Fargo's franchise at a time when it is already subject to heightened scrutiny."