In the wake of California’s unprecedented punishment of San Francisco-based Wells Fargo for bogus lending practices, legal sanctions spread eastward, with other state officials and Hillary Clinton herself going after the bank.

Already, in Washington, members of the House Financial Services Committee have demanded “that Federal Reserve Chairwoman Janet L. Yellen punish Wells Fargo for creating as many as 2 millions accounts without customers’ permission,” according to the Los Angeles Times. Although Yellen has so far declined, California Treasurer John Chiang’s swift action has created what could be enough momentum to send federal sanctions the bank’s way. In a recent news conference, Chiang “outlined specific sanctions that will remain in place for a year and target Wells Fargo’s ‘most highly profitable’ relationships with his office,” the Times added. In a letter to CEO and Chairman John Stumpf, Chiang asked how he could trust the bank going forward. 

“Chiang also said he will work with the state’s pension funds, which collectively own about $2.3 billion in Wells Fargo stock and bonds, to push for reforms to Wells Fargo’s corporate governance. Chiang sits on the governing board of the nation’s two largest public pension funds — the California Public Employees’ Retirement System and the California State Teachers’ Retirement System. He said he will push for the separation of the bank’s chairman and chief executive roles … and for the bank to review its compensation policies and possibly rescind more pay from executives linked to the fake-accounts scandal.”

Spreading criticism

On the heels of Chiang’s move, Wells Fargo also lost support among officials based in the other most significant financial center west of the eastern seaboard, Chicago. “Illinois is joining California in suspending Wells Fargo & Co. from handling ‘billions’ of dollars in investment work and the underwriting of state debt,” Bloomberg reported. “Treasurer Michael Frerichs said in a statement that he will announce details of the ban during a news conference in Chicago on Monday. The suspension includes municipal-bond underwriting, according to Greg Rivara, a spokesman for the treasurer.” Although some states, including Alaska and Oregon, have said their relationships with the bank are unchanged, “Connecticut decided last week to add Morgan Stanley to serve as lead underwriter with Wells Fargo on a state bond issue planned for next month to help ensure a successful sale,” the site noted. 

Now, Hillary Clinton has seized on the opportunity to make some political hay as well. At a campaign stop in Toledo, Ohio, Clinton described the situation as “[o]ne of the nation’s biggest banks bullying thousands of employees into committing fraud against unsuspecting customers. Secretly opening up millions of accounts without their consent, even their knowledge, misusing personal information, and then sticking customers with hidden fees,” according to Business Insider. “It is outrageous that eight years after a cowboy culture on Wall Street wrecked our economy that we are still seeing a powerful banker playing fast and loose with the law,” she said, introducing a proposal that would give consumers a right to sue instead of enter arbitration under circumstances like those created by the bank. 

Wells Fargo has scrambled to stanch criticism and maintain a firewall with federal officials. “Under fire over the unauthorized accounts, Wells Fargo’s board announced … it was stripping Mr. Stumpf of unvested stock awards valued at $41 million. He will also forgo his bonus this year and a portion of his $2.8 million base salary,” the New York Times observed. But “the move to retract a portion of Mr. Stumpf’s lavish compensation — at the time of Wells Fargo’s latest annual disclosure, he held shares and options valued at around $247 million — has not appeased some senators who criticized Mr. Stumpf,” including Elizabeth Warren, D-Mass., who has flexed her muscle as a financial hawk throughout her tenure. 

Systemic questions

As Wells writhes, questions have arisen as to whether their misdeeds were merely the first to be caught. At media outlets where financial reform has long driven coverage of the big banks, incensed reporters have been stonewalled in their efforts to find out. “Representatives from Bank of America, Citigroup, JPMorgan Chase and US Bank declined to respond when The Huffington Post asked them if they use the same high-pressure, lofty sales quotas that pushed underpaid Wells Fargo employees to rip off customers in an effort to keep their jobs or earn bonuses to enhance their low hourly pay,” the website reported. “Along with Wells Fargo, these banks are the five largest in the country, ranked by total assets.”

Toebben said trust your experiences — when wages go up speedily, businesses, especially small businesses, have to cut somewhere. If minimum wage is increased there would be fewer jobs (just as the Beacon Economics study sponsored by the Chamber stated, up to 140,000 fewer jobs over five years).

Hicks said it is common sense — if workers have more money they will spend the new money, which will increase the economy and create jobs (46,000 new jobs according to the Economic Roundtable who did its study for the Labor Federation).

The third study by UC Berkeley, done at the behest of the LA City Council, decided the lives of low-wage earners would improve which would overshadow job losses.

Since the dueling studies didn’t offer clarity to observers considering the question of raising the minimum wage, perhaps the debaters could break the gridlock. Reflecting the studies they sponsored, the debaters rolled out familiar arguments to buttress their positions.

Hicks argued that increasing the minimum wage for those barely getting by would decrease government subsidies in such things as child care and food stamps, saving the taxpayer dollars. Toebben said implementing a minimum wage increase of 50 percent in three years and 75 percent over 5 years, as proposed, would slow job growth in half and reduce revenue for city services for low-income families.

Hicks argued that business has claimed job loss as a result of minimum wage increase since the minimum wage came into being in the 1930s, and that has not happened. Toebben countered that business will have to compensate for the increased wages in some way. If not layoffs, then reductions in charitable contributions or advertising, for example, would come into play.

Toebben insisted that he was defending small business, which would be most affected by the increase. “This is all about Main Street, not about Wall Street,” he said.

Hicks conceded that exemptions might be made for some organizations like non-profits, some small businesses or young workers to ease the conversion to a higher minimum wage. The Chamber president said if no accommodation is made Los Angeles will have a reputation of a place not to start a business.

Common ground? Perhaps a small patch of turf, but not much more. Figuring out the exemptions and who gets what could be a regulatory nightmare, not to mention a field day for lobbyists.

The minimum wage increase proposals in Los Angeles include Mayor Eric Garcetti’s plan for an increase from $9.00 an hour to $13.25 by 2017. A city council proposal calls for an increase to $15.25 by 2019.

Other major West Coast cities — Seattle, San Francisco, Oakland — have already lifted their minimum wages recently. Could Los Angeles learn from those experiences?

Rusty Hicks said it was too early to measure the true impact, but he said there are now more restaurants in San Francisco since the minimum wage law was changed. To which Gary Toebben replied restaurants have closed in Oakland because of the minimum wage increase.

The studies didn’t give any clarity to those considering the minimum wage deliberations. The Town Hall debate probably didn’t change too many minds, either.

This week, Franklin Templeton filed vigorous objections to Stockton’s recovery plan, saying “no bondholder has ever received so little in the history of municipal bankruptcy.”

This is from Reuters:

The creditor, two funds managed by Franklin Templeton Investments, said Stockton’s plan to exit Chapter 9 bankruptcy was discriminatory and punitive.

Franklin said it would receive less than 1 percent of its $30.5 million unsecured claim in the case, now before the U.S. Bankruptcy Appellate Panel of the Ninth Circuit.

The brief claimed that by confirming a plan providing such a small distribution, compared with recoveries of 52 percent to 100 percent for other unsecured claims, U.S. Bankruptcy Judge Christopher Klein erred in backing Stockton’s exit plan. …

The Franklin team argued that Stockton would leave its two funds with little while leaving the city’s pension fund, the California Public Employees’ Retirement System, untouched.

CalPERS also made whole in San Bernardino

San Bernardino’s bankruptcy saga has key similarities. More from Reuters:

The bankrupt California city of San Bernardino revealed on Thursday details of its deal with the state’s public pension system CalPERS, in which the retirement fund will be paid in full under the city’s bankruptcy exit plan.

San Bernardino announced last year it intended to pay the powerful California Public Employees’ Retirement System in full under its bankruptcy plan, while cutting its bondholder debt. …

The CalPERS deal has angered other creditors, including holders of $50 million in pension obligation bonds, who face cuts to their debt. They are suing the city over the CalPERS deal. …

Luxembourg-based EEPK, holders of the pension bonds, and Ambac Assurance Corp, which insures a portion of them, sued San Bernardino in January, claiming the bonds are part of a single pension obligation, so that any payment to CalPERS requires equivalent payment to the bondholders.

Initial arguments on that lawsuit will be heard on May 11.

Bond companies likely to be wary of struggling cities

Analysts said this disparate treatment was likely to make bond companies — and Wall Street in general — wary of dealing with financially stressed cities in California.

CalPERS appears to have something of a home-court advantage in dealing with bankrupt cities. As attorneys for Franklin Templeton have laid out, bankruptcy laws generally are structured to ensure “everyone takes a haircut” in recovery plans.

That’s not happening in Stockton and San Bernardino — so far, at least.

As the Los Angeles Times reported, “L.A. lawmakers voted in August to try to renegotiate the agreements. Now, the unions are stepping up pressure on City Atty. Mike Feuer to file a regulatory complaint alleging that the city was not fully informed of the risks of such deals.”

But in a confidential report sent to lawmakers, Feuer warned these allegations would be so “weak” that courts might even see them as “frivolous,” according to the Times. Caving in to union pressure, he concluded, “can only serve to sully the city’s reputation and credibility in financial circles.”

L.A.’s public pensions negotiations caused the squabble. Garcetti’s team wanted unions to accept pay freezes and higher worker contributions to health care costs. Unions countered that the city was ripped off by bank deals carrying interest rates that could have ended up lower if no deals were signed.

Activists have convinced themselves that an investigation would reveal that Wall Street knowingly bilked the city of L.A. But the city has rejected that idea for a lack of evidence.

The controversy has raised questions about Wall Street’s role in these and other pension struggles, which have become increasingly prominent around the country. Even if the big banks weren’t culpable in the L.A. deals, their related interest in keeping public pensions afloat has ignited a debate of its own.

The big picture

In years past, Wall Street benefited in certain ways from big, complex public pensions. Tuesday’s GOP landslide, however, has underscored the political benefits of opposing them. As big finance has begun to reconsider its position on public unions, the unions themselves have also soured on the relationship.

As CUNY professor Daniel DiSalvo recently explained, “[U]nions are more often allies than adversaries with investment firms and consultants. The unions want larger pensions. The money mangers want higher fees. Everyone benefits from more expensive pensions — except the current consumers of government services and future generations.”

In DiSalvo’s home state of New York, for instance, “pensions have become more expensive, the funds have increasingly invested in private equities and other risky asset classes in search of higher returns.”

The Empire State has hardly been alone in this regard, of course. The California Public Employees Retirement System made waves when it pulled $4 billion out of its hedge-fund investments. But the even bigger news was other pensions’ refusal to follow suit; even CalPERS retained its hedge fund managers, according to CNBC.

At the same time, private-sector unions have begun to diverge politically from their public-sector brethren.

Nationwide, public-sector unions have become closely associated with busted state budgets and municipal bankruptcy. But while public workers’ jobs have been sheltered, particularly in states like California, private-sector unionized workers have found themselves without the same level of political protection, especially from Democrats willing to staunchly defend public employees.

Losing Democratic voters

In the Wall Street Journal, Steven Malanga recently showed how that process has played out in traditionally Democrat-dominated states like Illinois, Wisconsin, New Jersey and Rhode Island. In Rhode Island, Democratic gubernatorial candidate Gina Raimondo had to run against public-union largesse to prevail in her close race — much to the consternation of grassroots liberals.

If the Journal could be taken as a guide, however, one recent editorial in the wake of Tuesday’s Republican landslide has revealed Wall Street’s current attitude toward public pensions: “The lesson we hope other politicians, Republicans and Democrats, take is that public-union money can be defeated when the cause is just and you stand your ground.”

Although California has not traditionally been thought of as a state hostile to public-sector employees, even the West Coast may shift along with the rest of the country. Rifts in big cities like Los Angeles, and Gov. Jerry Brown’s stated interest in reducing pension sweeteners, could signal bigger changes to come.