The Federal Reserve just devised a harsh new punishment after Wells Fargo & Co. landed in scandal after scandal — one that may haunt every big bank.
The San Francisco-based lender had its rating cut by three analysts and fell by the most in more than two years on Monday after the Fed banned the bank from growing until it convinces authorities it's addressing shortcomings. The cap on total assets could cost it $400 million in profit this year and handicap it long-term by giving its largest competitors an advantage in pursuing new business.
Even as the Trump administration signals a loosening of regulations across industries including Wall Street, the Fed's move sets a unnerving tone for an industry where public scorn seems to shift every few years to another colossal U.S. firm.
"The harsh Fed consent order is rare and a strong sign of regulators' frustration about the very wide swath of areas where Wells has had issues," JPMorgan Chase & Co. analysts led by Vivek Juneja said Monday in a note to investors. The analysts downgraded their rating on the stock to underweight.
Shares of the company tumbled 8.3 percent to $58.77 at 9:34 a.m. in New York trading, after dropping to as low as $58.05. The stock posted the biggest drop in the 24-company KBW Bank Index, which dipped 1.4 percent as every lender's shares fell in a broad market decline.
Wells Fargo is moving to rectify the regulators' concerns, said spokesman Oscar Suris.
"As Friday's consent order acknowledges, Wells Fargo has made progress in enhancing its board governance and compliance and risk management, and that work continues through the consent-order process and ongoing actions such as recent key outside hires and additions to the board," Suris said Sunday in an emailed statement. "The company is confident that under Chair Betsy Duke and CEO Tim Sloan we will move swiftly to address the issues."
Ups, Downs
Major U.S. banks have bounced back from past crackdowns.
In 2013, JPMorgan Chase & Co. agreed to more than $23 billion in legal and regulatory settlements as the bank sought to resolve probes in areas including energy trading, oversight of services to Ponzi-scheme operator Bernard Madoff and mortgage-linked dealings by the bank and firms it acquired. The next year its assets grew by $157 billion.
In late 2011, mounting fines and liabilities over Bank of America Corp.'s role in the housing collapse pushed its stock price below $5. Still, the bank was able to add more than $80 billion in assets the following year.
Ratcheting Up
The Wells Fargo sanction — called unprecedented by Fed officials — arguably marks an apex for central-bank enforcement actions that have been ratcheting up in recent years.
The Fed has at times put a bank's growth in check, such as in 2005 when it told Citigroup Inc. that it was expected to not undertake "significant expansion" until it addressed the issues that gave rise to numerous compliance failures. But before the 2008 financial crisis, the Fed wasn't known for punishing lenders.
During former Chair Janet Yellen's tenure it changed course, routinely banning bankers from the industry who had been accused of misconduct and joining other regulators in imposing billions of dollars in fines on Wall Street firms.
