Archive for September, 2008

Wells Fargo seems to be ahead of its time in implementing sensible bank policies which are now standing them in good stead as banks try to weather the financial crises. Perhaps they should thank Socially Responsible Investment and Community Welfare advocates, who began raising the issue over four years ago and targeting Wells Fargo because of their aggressive lending practices. A historical tour of this campaign is simply fascinating given the news today.

This very worthy read, a September 2008 review of SRI Activity, notes that attention to predatory lending started in 1999: “Shareowner activists took note of this trend as early as 1999 after a keynote speech at SRI in the Rockies by Martin Eakes, founding CEO of Self-Help, a North-Carolina-based community development financial institution (CDFI.)”

April, 2004 – from a report issued by the Center for Responsible Lending on “A Review of Wells Fargo’s Subprime Lending”.

“One of the biggest drivers in Wells Fargo Bank’s steady income growth is its mortgage business, which contributes approximately one-third of the company’s earnings year after year. Des Moines-based Wells Fargo Home Mortgage (WFHM) is one of the nation’s largest mortgage originators and servicers. At the end of 2003, WFHM originations hit $470B and mortgage servicing reached a record $664B. Wells Fargo’s subprime mortgage lending totaled $16.5B in 2003. While this is modest volume compared to Wells Fargo’s prime mortgage originations, the company now ranks # 8 among B&C lenders and generally has been doubling its subprime volume each year since 2000.”

This detailed 10 page report covers the merger of Wells Fargo and Norwest and many lending practices, ending with the sad conclusion “Lulled by favorable analyst reports, Wells Fargo investors may not realize they are subsidizing a predatory lender. In addition, limited regulatory oversight and loopholes in regulations have enabled Wells Fargo Financial to hide predatory practices from federal regulators. Sadly, the people who see these problems most clearly are the unit’s customers, who too often face the loss of their home or financial ruin as a result.”

April 14, 2005 Responsible Wealth issues a press release:

On April 26, at the company’s headquarters in San Francisco, Wells Fargo shareholders will vote on a resolution that links CEO pay to the company’s progress on eliminating predatory lending practices, such as excessive fees, poor disclosure and interest rates that are higher than warranted by customers’ credit scores.
The resolution was filed by members of Responsible Wealth (RW) [with support of many other advocacy orgs], a network of affluent investors. [Who advocate for greater social opportunity, one of their top issues is preserving the estate tax!] … Since a similar resolution was put forth in 2004, Wells Fargo has met with representatives of Responsible Wealth and the Center for Responsible Lending (CRL) to discuss changes in their lending practices.
Nevertheless, the company has lagged behind other companies that have eliminated predatory practices. For instance, following a similar campaign by RW, CRL, and the Association of Community Organizations for Reform Now (ACORN), Citigroup agreed to cap fees, reduce prepayment penalties and ensure that all customers received rates appropriate to their credit history, regardless of which division of the company handles the loan application. “

Now isn’t that interesting… Citigroup. And how are they faring today?

August 31, 2005 – Wells Fargo Implements Borrower Protections, LA Times.

Wells Fargo announces a series of changed lending practices, including “include more clearly defining and limiting upfront fees, easing penalties for borrowers who refinance or pay off loans early, and eliminating mandatory arbitration of disputes”. ACORN made a grudging statement “glad that the company has finally acknowledged the damage that their practices have been causing and have agreed to change them.” However, they weren’t satisfied, and only a couple months later were out picketing Wells Fargo’s national headquarters contending that the company’s lending still discriminated against minorities: “Nationally, black Wells Fargo borrowers are nearly four times as likely to pay extraordinary loan rates as whites, according to information compiled by Responsible Wealth. Nearly 30 percent of blacks taking out first-year loans from the company pay high interest rates.”

The Minority Wealth Gap is a real issue, but the changes Wells Fargo made at the time apparently satisfied at least one investor; what’s really interesting to me as I do this research, is the discovery that around Q3 2005 is when Warren Buffet decided to buy in, according to this report:

“Warren Buffett also revealed his holdings in Wells Fargo & Co. (WFC) today [Feb 4, 2006], after disclosing his holdings in H. R. Block (HRB) and Torchmark Corp. (TMK) in January. During the third quarter of 2005 Buffett kept his holdings in these companies confidential. As revealed by the amended filings of Berkshire Hathaway, Warren Buffett added his positions in Wells Fargo & Co. (WFC) by about 50%. Currently Berkshire holds 85 million shares of Wells Fargo. Wells Fargo is now the 4th largest equity holding of Berkshire Hathaway, behind Coca-Cola Co. (KO), American Express Co. (AXP) and Procter & Gamble Co. (PG).”

The stock wasn’t particularly pounded and “the street” wasn’t really paying attention. I checked the stock price on Yahoo (NYSE:WFC) and it had increased mildly over 2005, fluctuating between a high of 31 and a low of 29.

By 2007, at least one traditional investment newsletter was raving about Wells Fargo. Dan Ferris, of Daily Wealth reports: “Of all the companies involved in the subprime space, the one that really leaps out at me is Wells Fargo (NYSE: WFC). Wells Fargo is without a doubt the highest-quality mortgage underwriter I’ve found in my research.” He concludes “were I in the market for a large-cap stock, I’d back up a U-Haul and fill it with Wells Fargo common stock.”

It so clearly needs to be said, so I’ll say it: Thanks SRI Community!

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Political Capital

While driving to our weekend getaway along the Columbia River, we listened to Bob Mondello’s NPR story on the 1960s heyday of the financial musical, when shows were about the trials and tribulations of the sort of business folk who worked nearby on wall street. He highlights entertaining songs such as “Capital Gains” from “Subways are for Sleeping”. He also relays the plot of a show titled “The Rothschilds” about the rise of the Jewish banking family to the point where they had enough political influence to press for a declaration of rights for European Jews in the 1800s. The play’s climax comes when the family takes revenge on a German Prince who promised political support in return for a loan and then reneged. They do so by nearly bankrupting themselves undercutting the price for German Peace Bonds, successfully preventing the state from raising needed funds and getting a capitulation from the Prince which also guarantees them a piece of all future bond business.

Later that weekend we climbed Beacon Rock, the 2nd largest freestanding rock in the world after The Rock of Gibraltar. Beacon Rock was introduced into European history by Lewis and Clark in 1805. Most of the park signage noted that Beacon Rock was purchased by Henry J. Biddle in 1915 for $1 from Charles Ladd on the condition it be protected. Biddle’s children eventually got the rock turned into a state park. According to The Lewis and Clark Columbia River Water Trail, by Keith G. Hay, Charles Ladd purchased Beacon Rock in 1904 from a Philadelphia banker and investor in the Northern Pacific Railroad, Jay Cooke. Hay does not report a purchase price; however it seems likely that it was more than $1. Charles Ladd’s wife Sara was an award winning amateur photographer, and I learn from an article about her in the Oregon Historical Quarterly (Glauber, Spring 2007) that Charles Ladd was a successful Portland banker and businessman.

Both of these stories are about situations where people have enough capital that they’ve moved beyond using it for productive value or speculative value and into purely using it for political value. Interestingly they both involve losing large sums of money, or at least being able to risk doing so. The first story is a financial negotiation where being the last financier standing gives one control over a situation which could ultimately make their money back. Charles Ladd made more of an outright donation: sacrificing the difference in prices paid in return for a guarantee of preservation – a move that also reaped large future rewards but for the public rather than for himself.

For me, the key common element here is to note how excess capital trumps multi-party decision-making. Certainly easy to applaud when it’s a triumph of righteousness, but as a general principle it leads away from democratic governance. Theoretically, this kind of power comes from commercial success, which could be a kind of endorsement for the right to wield it. Unfortunately I think this “economic permission for power” is difficult to sustain in a world where businesses operate at non-local scale so that it’s impossible for customers to understand the full impact of who they choose to give their business to, or hold those at the top accountable in a social way.

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Rick and Shauna have run a jewelry store for over 25 years. We got talking about how they got started on $1000 in cash and raw determination. Rick built their first display cabinets himself and they would trade jewelry work for other services they needed- like interior work on their first store. Shauna would work to get items for customers on short order when their inventory was still small and used carved waxes in their display cases to showcase their designs on the cheap. Shauna told a story about how they worked seven days a week for years until another friend was killed in a freak accident and they realized they needed to start living some of life in the moment, at which point they finally started closing Sundays and Mondays. At one point Rick used the term “sweat equity” for how they were able to get off the ground by doing work for other jewelry stores to keep themselves afloat while they built their business.

I’m preparing for a trip to Spain to visit Mondragon – a series of worker cooperatives that were started in 1956. Since then they have launched or converted over 100 separate businesses as cooperatives to do various kinds of manufacturing and distribution. I’m familiar with Mondragon because the cooperative structure is an opportunity to better align the interest of wage labor and ownership in larger organizations by making them the same, and Mondragon is an oft heralded and much-studied example. At some level they’re a fascinating open experiment in the global struggle between the rights of labor and the rights of management, and thus folks seem to like to periodically predict the death or triumph of their model as the Mondragon Experience (as they call it) copes with economic downturns, globalization and the creation of the EEC. I’ll likely be writing more about Mondragon, but I compare them to Rick and Shauna because part of their model has been to help workers launch new cooperatives by building up equity through labor and doing spin-offs.

William F. Whyte is a researcher from Cornell who has studied Mondragon since 1977. Whyte published an article in 1999 with updates about changes due to globalization. An interesting aspect of Mondragon is that they established their own credit union early on, and it has played a critical role in the growth of new businesses. I have read criticism that this bank was no longer supporting the cooperative system as well as perhaps it once did, that rather than investing in new cooperatives the bank now invests in private partnerships. According to Whyte, at this point nearly ¾ of the banks investments are in private companies outside the cooperative network. It was with some surprise that I read the system actually no longer forms new cooperatives:

“we talked to Jose Maria Ormaecbea, one of tbe five founders of Ulgor [the very first cooperative in 1956] and, as of 1990, still a key leader. As be saw it, the main reason worker cooperatives were becoming increasingly difficult to create was that technological changes were requiring far more investment than bad been necessary when the first production cooperatives were being formed in the 1950s and 1960s. In that early era, founding members of a cooperative worked for two years at bottom labor rates. What they saved by so doing was converted to capital accounts, meaning that money was loaned by members to the cooperative they were forming. That amount was then supplemented by a grant from the Basque regional government to support job creation. By 1990, the required investments could be financed only if workers put in four or five years at reduced pay—and even then, Ormaecbea said, shortfalls could occur. The MCC [leadership body of Mondragon] leaders reluctantly abandoned their program of creating cooperatives by that means.”
Industrial and Labor Relations Review, Vol. 52, No. 3 (April 1999) William F. Whyte

Economists all recognize that we’re in a period of increasing income and wealth inequality but they argue about whether or not it matters. I argue that it does –The gap between wage labor rates and the amount of capital required to launch a competitive business has widened, to the point where it may not be possible to be the next Rick and Shauna unless your social connections put you in the upper half of our hourglass economy and you have access to Friends and Family funders who can get you started. It means America is decreasingly the land of opportunity and increasingly a place where “who you know” outranks “what you know” or “how hard you work”. Because it’s a naturally reinforcing spiral, if this is not what we want America to be, we have to proactively address it.

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