TIME financial regulation

Why It Matters That Congress Just Swapped The Bank Swap Rule

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NICHOLAS KAMM—AFP/Getty Images

A controversial change to the Dodd-Frank financial reforms trades more risk for taxpayers to get more profits for banks and their corporate clients

Banks may be officially allowed to get back in the casino business again soon.

Hidden as a rider in the $1.1 trillion continuing resolution omnibus bill—the hulking “Cromnibus”—that passed the U.S. House last night are a few, measly pages that pack a whole lot of punch. They repeal what’s known as the Lincoln Amendment in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

The Lincoln Amendment, which you’ll also see referred to in other articles as “Section 716″ or the “the swaps push-out rule,” was, if not Dodd-Frank’s heart and soul, than at least one of its vital organs. It says, basically, that banks can make risky bets on behalf of paying clients, but if they screw up and get into trouble like they did in 2008, then taxpayers aren’t responsible for bailing them out.

It did that by requiring that banks set up two big buckets: one that was backed by taxpayers (FDIC-insured), and one that was not. The idea was that banks would keep all of their normal, plain-vanilla banking activities in the FDIC-insured bucket, and then “push out” swaps and other risky contracts, like exotic, customized, and non-cleared derivatives, into the other bucket. (Swaps are contracts that allow banks to hedge their risks or speculate on everything from interest rates to currency prices. Credit default swaps contributed to blowing up the economy in 2008. Warren Buffet once called these sorts of derivatives “financial weapons of mass destruction.”)

If the Cromnibus passes the Senate in the form that it passed the House last night, the Lincoln Amendment will be officially repealed. Dead. Kaput. Gonzo. The swap casino will again operate with the tacit backing of taxpayers. If markets go haywire, as they did in the last financial crises, taxpayers may again find themselves forced with a choice between bailing out the casino owners and a systemic financial collapse.

The Bipartisan Policy Center, which is generally in favor of financial regulation, says people shouldn’t overreact to that news. It released a statement yesterday saying, in essence, “Relax, we still have the Volcker rule,” a reference to a different provision of Dodd-Frank that bans banks from using taxpayer-backed accounts to make their own bets on the future movement of markets.

But as the folks at the Roosevelt Institute point out, that argument doesn’t really make sense. It’s like saying that because you’re wearing a t-shirt, you don’t need a sweater. It’s true that the Lincoln Amendment and the Volcker rule overlap in some ways, but their coverage is different.

The heart of the Volcker rule is all about proprietary trading, which is when banks trade for their own profits and not on behalf of their customers. It’s similar to the Lincoln Amendment in that it doesn’t specifically outlaw anything; it says that banks can proprietary trade all they want, but if they get into trouble, taxpayers aren’t bailing them out. Lots of people in the financial world think that the Volcker rule is the most important part of Dodd-Frank, but it doesn’t cover everything.

The Volcker rule, for example, doesn’t apply to all risky financial products, like exotic and uncleared credit default swaps. That’s where other regulations, including the Lincoln Amendment, took up some of the slack. Unlike the Volcker rule, the Lincoln Amendment did apply to exotic and uncleared credit default swaps, and required that banks “push out” swaps into a bucket that was not backed by the taxpayers.

The best argument for not freaking out about the repeal of the Lincoln Amendment is that it wasn’t nearly as strong as its drafters intended it to be. The final version had loopholes the size of Montana. For example, while the Lincoln Amendment was intended to lasso all risky instruments, by the time all was said and done, it really only applied to about 5% of the derivatives activity of banks like Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo, according to a 2012 Fitch report.

In other words, the banks are in the casino business whether or not the Lincoln Amendment is repealed. But liberal Democrats, including Senators Sherrod Brown of Ohio and Elizabeth Warren of Massachusetts as well as a handful of conservative Republicans, like Rep. Walter Jones of North Carolina, say 5% of protection is better than none at all. They oppose the Cromnibus so long as that rider is in it.

House Republicans, for their part, say eliminating the Lincoln Amendment would streamline regulation, boost the economy, and “protect farmers and other commodity producers from having to put down excessive collateral to get a loan,” according to a summary statement. The bill is expected to pass the Senate, rider and all.

TIME Companies

U.S. Hits Deutsche Bank With $190 Million Tax Fraud Lawsuit

A general view of Deutsche Bank on Sept. 5, 2011 in London.
A general view of Deutsche Bank on Sept. 5, 2011 in London. Dan Kitwood—Getty Images

Justice Department has accused the banking giant of using shell companies to conceal profits and avoid paying taxes

The Justice Department has sued Deutsche Bank for fraud over an alleged scheme to avoid paying federal taxes.

The government is seeking more than $190 million in back taxes plus penalties and interest.

The lawsuit, which was filed on Monday in federal court in New York, alleges that Deutsche Bank DB -1.23% engaged in a series of transactions meant to evade federal income taxes — leaving the U.S. government “with a significant, uncollectable tax bill,” according to the Justice Department.

“Through fraudulent conveyances involving shell companies, Deutsche Bank tried to make its potential tax liabilities disappear,”Manhattan U.S. Attorney Preet Bharara said in a statement. “This was nothing more than a shell game.”

The government went on to describe the alleged fraud, which included the German bank’s creation of three separate “shell companies” as well as a series of subsequent transactions involving those companies that federal authorities claim were designed to avoid federal tax laws.

Deutsche Bank responded to the allegation in a statement to Fortune, saying: “We fully addressed the government’s concerns about this 14-year old transaction in a 2009 agreement with the IRS. In connection with that agreement they abandoned their theory that [Deutsche Bank] was liable for these taxes, and while it is not clear to us why we are being pursued again for the same taxes, we plan to again defend vigorously against these claims.”

This article originally appeared on Fortune.com

MONEY alternative assets

Lending Club’s $4 Billion IPO Puts Peer-to-Peer Lending in the Mainstream

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Getty Images

Lending Club priced its IPO on Monday, putting it in the ranks of the biggest public offerings ever for an Internet company. Here's what you need to know about peer-to-peer lending.

UPDATE: On Monday, peer-to-peer lending company Lending Club announced it would be pricing its upcoming IPO at $10 to $12 a share in an effort to raise as much as $692 million. (Click here to read the filing.) At the midpoint of the range, that would value the company at around $4 billion. Now that P2P lending has firmly entered the mainstream (and then some), it’s worth looking again at the advice we published in August, when Lending Club filed to go public, on how P2P lending works and how best to use Lending Club and similar services.

Your bank makes money off borrowers. Now you have the opportunity to do the same. One of today’s hottest investments, peer-to-peer lending, involves making loans to strangers over the Internet and counting on them to pay you back with interest. The concept may be a bit wacky, but the returns reported by sites specializing in this transaction—from 7% to 14%—are nothing to scoff at.

Investors aren’t laughing either. Lending Club, one of the leading peer-to-peer lending companies, filed to go public on Wednesday. The New York Times reports the company is seeking $500 million as a preliminary fundraising target and may choose to increase that figure.

Such lofty ambitions should be no surprise, considering that the two biggest P2P sites are growing like gangbusters. With Wall Street firms and pension funds pouring in money as well, Lending Club issued more than $2 billion of loans in 2013, and nearly tripled its business over the prior year. In July, Prosper originated $153.8 million in loans, representing a year-over-year increase of over 400%. The company recently passed $1 billion in total lending. “A few years ago I would have laughed at the idea that these sites would revolutionize banking,” says Curtis Arnold, co-author of The Complete Idiot’s Guide to Person to Person Lending. “They haven’t yet, but I’m not laughing anymore.”

Here’s what to know before opening your wallet.

How P2P Works

To start investing, you simply transfer money to an account on one of the sites, then pick loans to fund. When Prosper launched in 2006, borrowers were urged to write in personal stories. Nowadays the process is more formal: Lenders mainly use matching tools to select loans—either one by one or in a bundle—based on criteria like credit rating or desired return. (Most borrowers are looking to refi credit-card debt anyway.) Loans are in three- and five-year terms. And the sites both use a default investment of $25, though you can opt to fund more of any given loan. Pricing is based on risk, so loans to borrowers with the worst credit offer the best interest rates.

Once a loan is fully funded, you’ll get monthly payments in your account—principal plus interest, less a 1% fee. Keep in mind that interest is taxable at your income tax rate, though you can opt to direct the money to an IRA to defer taxes.

A few hurdles: First, not every state permits individuals to lend. Lending Club is open to lenders in 26 states; Prosper is in 30 states plus D.C. Even if you are able to participate, you might have trouble finding loans because of the recent influx of institutional investors. “Depending on how much you’re looking to invest and how specific you are about the characteristics, it can take up to a few weeks to deploy money in my experience,” says Marc Prosser, publisher of LearnBonds.com and a Lending Club investor.

What Risks You Face

For the average-risk loan on Lending Club, returns in late 2013 averaged 8% to 9%, with a default rate of 2% to 4% since 2009. By contrast, junk bonds, which have had similar default rates, are yielding 5.7%. But P2P default rates apply only to the past few years, when the economy has been on an upswing; should it falter, the percentage of defaults could rise dramatically. In 2009, for example, Prosper’s default rate hit almost 30% (though its rate is now similar to Lending Club’s). Moreover, adds Colorado Springs financial planner Allan Roth, “a peer loan is unsecured. If it defaults, your money is gone.”

How to Do It Right

Spread your bets. Lending Club and Prosper both urge investors to diversify as much as possible.

Stick to higher quality. Should the economy turn, the lowest-grade loans will likely see the largest spike in defaults, so it’s better to stay in the middle to upper range—lower A to C on the sites’ rating scales. (The highest A loans often don’t pay much more than safer options.)

Stay small. Until P2P lending is more time-tested, says Roth, it’s best to limit your investment to less than 5% of your total portfolio. “Don’t bank the future of your family on this,” he adds.

MONEY Banking

Guess Which Big Bank Has the Unhappiest Customers

Shovel burying money in hole in backyard
Summer Derrick—Getty Images

A new poll finds consumers are disappointed across the board with their banks—but credit unions fared far better.

Customers have grown less happy with their banks over the past year, according to a new American Customer Satisfaction Index survey. Blame low interest rates and high fees, as well as decreasing access to ATMs and branch locations.

More than 1,500 Americans were polled on their experiences with their banks and credit unions for the study, which was released on Tuesday.

Affirming previous studies from other organizations, consumer satisfaction was the lowest at big banks—with Bank of America and Wells Fargo faring the worst among their peers.

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Source: ACSI

Although the survey results showed Bank of America has improved in some specific areas, a spokesperson for the bank wrote, “We know we still have some work left to do.”

The decline in scores on fees and service for retail banks overall coincides with a big growth in the number of people banking at credit unions as an alternative. “Consumers are finding that the best way to avoid bank fees may be to avoid banks altogether,” says ACSI founder Claes Fornell.

The shift isn’t surprising, given that credit unions score better on speed and “courtesy and helpfulness of staff” and can offer twice as much interest as regular retail banks.

Some of the worst categories for retail banks were “competitiveness of interest rates,” down to a score of 71 from 73 last year, and “number and location of branches,” down to 76 from 79 last year.

Satisfaction with access to ATMs was down for both banks and credit unions, as institutions have been reducing the ranks as a result of cost cutting.

Feeling unsatisfied with your own banking relationship? You could take a cue from the results and go to a credit union, for a far better shot at happiness. Most people are eligible for membership to at least one.

But if you prefer a more traditional retail bank—or a leaner, high-interest-paying online bank—use MONEY’s bank matchmaker tool to find the best fit for you.

MONEY Banking

Why the Right Bank for You Might Not Be a Bank

Postage stamp printed in USA, dedicated to the 50th Anniversary of Credit Union Act.
Sergey Komarov-Kohl—Alamy

The best place to park your cash might be a credit union—a nonprofit financial cooperative that serves a select population.

MONEY recently released the results of its 2014 Best Banks survey, which awarded 11 banks honors for low fees, high interest rates and other customer-friendly policies. But it’s possible the best place for you to park your cash might not be on that list.

Rather than a bank, you may be better off with credit union—a nonprofit financial cooperative that serves a select population, like workers at a specific company or residents of a certain county.

Credit unions tend to offer better terms than banks. According to WalletHub, they pay an average 0.23% on $10,000 in savings—twice the average of banks in our study—and 73% offer free checking.

Also, credit unions are known for having more personal customer service, owing to the fact that they are owned by members and are often small (some have just one branch).

Because of their size and membership requirements, credit unions weren’t included in MONEY’s survey, but you can use these steps to find yourself a winner:

Look under rocks.

“We’re pretty sure everybody in the country is eligible to join at least one credit union—and probably several,” says Bill Hampel of the Credit Union National Association.

Start at asmarterchoice.org and nerdwallet.com/credit-union. Also check with your town, employer, alma mater, and religious institution. And ask family which ones they belong to.

Do a smell test.

Compare the yields to the averages at MONEY’s best midsize banks—at least 0.15% on checking and 0.56% on savings. (Online banks pay more but don’t offer the comparable personal attention.)

Also find out if the credit union has fee-free accounts, and if not, check the minimum-balance requirements to make sure you’d avoid a maintenance fee.

Get out the ruler.

Small credit unions often have just one branch. But about half belong to the CO-OP network, which offers you -access to more than 5,000 shared branches and almost 30,000 ATMs.

To avoid costly fees when you get cash, see if your best option has its own or partner ATMs near your home and work. If you’ll use teller service, make sure the branch is easily accessible.

Of course, CUNA reports that 88% of credit union members are offered mobile apps and 55% allow check deposits via smartphone—so you might not need a teller after all.

See MONEY’s 2014 list of the Best Banks in America

Try out MONEY’s Bank Matchmaker tool to find the best bank for you

MONEY mobile payments

This Is How Walmart Can Win Its War With Apple

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Frederic J. Brown—AFP/Getty Images

Retailers rejecting Apple Pay is just the latest salvo in a longstanding war between merchants and banks. Now the battle is coming to a head, pitting the world's biggest retailer against the world's most powerful tech company.

Corrected — 5:21 P.M.

When Apple Pay triumphantly launched last week, there was hope in the air. The service generally worked as advertised. The reviews were mostly positive. For a brief moment, it seemed, the emergence of phones-as-wallets would be one technology transition that happened smoothly.

But it’s never that simple; not with this much money on the line. Over the weekend, news broke that Rite Aid and CVS were dropping support for Apple’s payment system. An in-house memo, leaked by Slashgear, revealed the reason: The merchants plan to release their own mobile wallet next year. Until then, users of Apple Pay—or Google Wallet, or any other mobile payment service—would simply have to pay with plastic.

Apple Pay is not simply a fun new feature for your smartphone. It’s the most audible shot in a larger conflict that pits retailers against credit card companies and banks in a battle for the future of payment. Apple is just the most recent—and most visible—belligerent in this battle, and now the fight is finally spilling over into the mainstream.

What This Is Really All About

Doug McMillon, CEO of Walmart, is at war with credit cards. From his perspective, American Express, Visa, Mastercard, and the banks who issue their products are shaking his company down for billions each year. Whenever a customer swipes a credit card, part of that payment—between 1% and 3%—goes to the card’s issuer in what is known as an interchange or “swipe” fee. That means Walmart, and other major retailers, are losing serious money every time someone pulls out the plastic.

The retail giant has been fighting this situation for more than a decade. Back in 2003, Walmart was one of around 50 retailers to join an antitrust suit against Visa, Mastercard, and the banks that issue their cards, accusing them of conspiring to inflate credit-card fees above market rates. The card companies offered merchants $5.7 billion in compensation, as well other other concessions, but Walmart rejected the settlement in favor of filing separate lawsuits against individual companies.

It’s not hard to understand why Walmart turned down the deal. Depending on how many of the company’s customers are using credit cards, major retailers can spend billion of dollars in a single year on fees. That’s why, at the end of the day, Walmart felt that money alone could not make things right. “The settlement does nothing to reform the price-fixing payments system that has let credit card swipe fees skyrocket over the past decade and nothing to keep them from continuing to soar in the future,” explained Mallory Duncan, general counsel at the National Retail Federation, after his group (which includes Walmart) rejected the deal.

What merchants like Walmart really want is their own payment system — one that isn’t controlled by third-party financial companies who take whole percentage points of revenue for their services. So they decided to make one.

Wallet Wars

The retailers faced two challenges in trying to disrupt credit-card companies: One, getting a competing payment system into the hands of consumers; and two, creating a cheaper system to process those payments.

On the first count, companies like Starbucks have proven that consumers are willing to embrace proprietary wallet apps if they get deals in return. The coffee giant’s app, released in 2009, allows users to fill a virtual Starbucks card with money and then pay by scanning an advanced bar code called a QR code. Loyal customers are rewarded with free coffee. The Starbucks app now accounts for 11% of the company’s sales and over four million transactions a week. (Benjamin Vigier, the mastermind behind Starbucks’ application, joined Apple in 2010.)

While apps emerged as a good consumer-facing approach to a modern payment system, merchants were also hard at work developing behind-the-scenes payment-processing systems. Target’s REDcard looks like a normal debit card (it even offers cash back), but works only at Target stores and dodges traditional payment networks. “It’s a debit card in the sense that it’s debiting straight from a bank,” explains James Wester, research director of global payments at IDC, “but using different rails.”

Cheaper rails, that is. Target uses something called Automated Clearing House (ACH) to process REDcard transactions. Michael Archer, a global financial services expert at Kurt Salmon, estimates ACH transactions are one-tenth as expensive for retailers as credit cards, and a little less than half the cost of a normal debit card transaction. Multiply that times billions of transactions and it’s a lot of savings.

In 2012, a group of retailers led by Walmart decided to combine these two approaches and make a mobile wallet app that would work across all of their stores. The companies formed a group—Merchant Customer Exchange, or MCX for short—and set to work creating a product that would be as usable as credit cards and work over a cheaper payment network, just like REDcard, by connecting directly to a user’s checking account.

The result was CurrentC. The app, which is set to launch in the first half of 2015, works on iOS and Android phones and allows users to pay at participating retailers by scanning a code at checkout. CurrentC will automatically apply coupons and loyalty programs at the register, giving consumers an incentive to choose CurrentC over competing e-wallets.

Apple the Underdog?

Initial reviews of CurrentC are not flattering. TechCrunch called the service a “clunky attempt to kill Apple Pay and credit card fees” and complained that the system seems built for retailers, not consumers (which, after all, is true). Quartz mocked MCX merchants’ penchant for developing anti-consumer technology (like this comically long receipt) and others worried the app was a conspiracy to grab customer data.

Apple Pay supporters have a point. CurrentC is clunky—at least in its current beta state—and Apple Pay certainly wins on privacy by keeping all transaction data away from merchants. But as hard as it is for Walmart detractors to admit, CurrentC also also has some advantages over Apple Pay.

For one, the largest retailers in the country have hitched their horse firmly to the CurrentC bandwagon. Apply Pay may have some big names—such as Walgreens, Toys R Us, McDonalds, and of course, Apple itself—but MCX has more. CurrentC’s coalition includes Walmart, Target, K-Mart, 7-Eleven, Best Buy, Gap, Banana Republic, Dunkin’ Donuts, and a host of other major retailers from a diverse mix of industries. Together, the participating merchants process more than $1 trillion in payments every year.

This stable of retail powerhouses puts CurrentC in a powerful position. Are consumers going to boycott their favorite stores just because they’re asked to scan a code (or swipe a card) instead of wave their iPhone? Unlikely. Especially considering Apple Pay is limited to iPhone users only. The cross-platform CurrentC app may win fans simply because it’s available to millions more people, and works at more popular stores.

Second, Apple Pay isn’t especially appealing to retailers. The payment system costing merchants interchange fees every time it’s used and they don’t get any consumer data from purchases. The QR code technology that powers CurrentC is also less expensive than the NFC terminals required by Apple Pay, and many more stores already have QR readers installed.

Another problem with Apple Pay is that it’s not built to support merchant loyalty programs. “The real value of mobile wallets is merchants can put loyalty in them and get repeat business,” says Henry Helgeson, CEO of Merchant Warehouse, a company that provides point-of-sale technology for both platforms. (Helgeson predicts Apple will add loyalty features in the next version.)

“Apple Pay is a different form factor for the same things that have been plaguing [retailers] for decades,” says IDC’s Wester. “Other than getting a very vocal group of people who are loyal to Apple, I’m not sure a good value proposition has been shown to merchants yet.” CurrentC, meanwhile, has the potential to save the MCX coalition billions annually in processing fees.

Third, and perhaps most importantly, Apple Pay isn’t really a great deal for customers, either. Industry experts are skeptical the masses will adopt a mobile wallet that offers a slightly more convenient experience, and not much more. “‘Hey, I get to use a credit card on my phone’ is not a sufficient value proposition,” argues Archer, the financial services analyst. “Ongoing use requires a return of value. ‘Cool’ is good for one time. Probably not beyond that.”

The research backs him up. In a recent study by his firm, 61% of current mobile wallet users said rewards and loyalty programs are the primary reason they use their smartphone to make payments. CurrentC is built around these sorts of deals. Apple Pay decidedly is not.

Who Should We Root For?

Of course, neither side is really in it to help consumers. Apple is arguably in league with the banks and card companies, accepting a slice of each transaction as a reward for helping perpetuate the credit-card status quo. Meanwhile, Walmart is in this fight to lower its expenses, not make things cheaper for the average Joe.

However, despite MCX’s less-than-pure motivations, its wallet app is more likely to save customers money. Target’s REDcard offers 5% off all purchases as a reward for using a cheaper payment processor and giving Target information on what you buy. If CurrentC ultimately offers similar deals, consumers will be forced to choose between cool and cash — and many may ultimately opt for the latter.

One thing’s for sure: Neither side will go down without a fight.

Correction: A previous version of this article said Apple Pay did not support debit cards. In fact, some debit cards are supported.

MONEY Banking

Use These Tools to Find the Best Banks and Credit Cards for You

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Answer a few simple questions, and we'll help you find a bank that will earn you more and a credit card that will cost you less.

Which bank has the most branches in your neighborhood and the lowest ATM Fees? Which credit card is best to take on your international travels? Check out MONEY’s annual rankings of the Best Banks and Best Credit Cards, and use our new Bank Account Matchmaker and Credit Card Matchmaker tools to find the accounts and plastic that are right for you.

Click here for the Bank Account Matchmaker

Click here for the Credit Card Matchmaker

 

MONEY Ask the Expert

How Can I Save More?

Financial planning experts share easy ways to trick yourself into setting more money aside for your future.

MONEY Careers

This Guy Emailed His Boss for a Raise — And Cc’d the Entire Company

Hand waiting for money
Image Source—Getty Images

A Wells Fargo worker asked his boss for a company-wide raise of $3 billion, and he CC'd about 200,000 people. But his manager says he won't be fired.

In what might be the ultimate power negotiating tactic, a Wells Fargo employee asked his boss for a raise over email and intentionally copied the entire company.

As the Charlotte Observer reports, Tyrel Oates, age 30, wrote Wells Fargo CEO John Stumpf asking him to give each of the company’s approximate 263,500 workers a raise of $10,000. According to the Observer, roughly 200,000 of those employees were copied on the exchange.

Why did Oates demand such a hefty pay bump? He wants to reduce the nation’s income inequality.

In the full letter, which appears to have been posted on Reddit, Oates writes: “Wells Fargo has an opportunity to be at the forefront of helping to reduce [income inequality] by setting the bar, leading by example, and showing the other large corporations that it is very possible to maintain a profitable company that not only looks out for its consumers and shareholders, but its employees as well.”

After noting that Stumpf made $19 million dollars last year, Oates proposes his solution: “My estimate is that Wells Fargo has roughly around 300,000 employees. My proposal is take $3 billion dollars, just a small fraction of what Wells Fargo pulls in annually, and raise every employees annual salary by $10,000 dollars. This equates to an hourly raise about $4.71 per hour.”

“By doing this, Wells Fargo will not only help to make its people, its family, more happy, productive, and financially stable, it will also show the rest of the United States, if not the world that, yes big corporations can have a heart other than philanthropic endeavors.”

Oates told the Observer he currently makes $15 an hour processing requests from Well Fargo customers wanting advice on how to stop debt-collection calls. Despite working at the company for seven years, his hourly wage has increased by only $2 since the day he started.

The letter concludes with a plea for fellow employees to organize and stand up for themselves. “While the voice of one person in a world as large as ours may seem only like a whisper,” it reads, “the combined voices of each and all of us can move mountains!”

Luckily for Oates, while the CEO hasn’t (yet) responded to the letter, his employment doesn’t appear to be in danger. Oates’ manager has said he won’t be disciplined. “I’m not worried about losing my job over this,” Oates told the paper.

When contacted by the Huffington Post for comment, Wells Fargo would not address the letter’s text (which the Post confirms is authentic), but issued the following statement: “We provide market competitive compensation that combines base pay with a broad array of benefits and career-development opportunities for team members. Team members receive an annual performance and salary review. And all of our team members’ compensation levels significantly exceed federal minimums.”

TIME Economy

Could a 40-Year-Old Bank Collapse Have Saved the U.S. Economy?

Michele Sindona In His Office
Michele Sindona in his office in 1970, before Franklin National Bank collapsed Mondador / Getty Images

Forty years ago, the U.S. did a good job of overseeing a failed bank. Then came Lehman Brothers

When Franklin National Bank collapsed 40 years ago on Oct. 8, 1974, it was more of a beginning than an end. A lurid tale of the bank’s downfall emerged over the next decade, involving mafia connections, ambitious Wall Street wannabes à la Jordan Belfort and a principal investor with a suspicious bullet wound in his leg.

More importantly, the bank’s demise was the first notable instance in which federal regulators helped a major bank wind down its operations in order to prevent global economic damage.

Franklin began as a humble Long Island bank with big-league aspirations. In the 1960s, the bank made questionable financial decisions to expand its operations and bum-rush the Manhattan banking scene. Franklin’s overzealous bankers bought a luxurious, too-large office on Park Avenue and sold a controlling stake in the firm to a shady Milan-based international financier, Michele Sindona.

The Sindona story reads like an American Hustle-style, stranger-than-fiction tale. In 1974, high-risk loans, ill-advised foreign currency transactions, and swings in foreign exchange rates caused Franklin to hemorrhage cash. The company lost $63 million in the first five months of 1974, more than any other bank in American history until that point. Not long after, the U.S. charged Sindona with illegally transferring $40 million from banks he controlled in Italy to buy Franklin National, and then siphoning $15 million from it. In August of 1979, just before his trial was about to begin, Sindona — who had ties to the Vatican and likely the Mafia — disappeared under mysterious circumstances; his family and lawyers got letters that “supposedly proved that he had been abducted by Italian leftist radicals,” according to TIME’s coverage of the episode. When he finally emerged after nearly three months — in a payphone booth near Times Square — he had what he said was a bullet wound in his leg. (Sindona claimed he was kidnapped by Italian terrorists but his defense later admitted it was a hoax, and Italian magistrates said that a secret Masonic lodge helped Sindona fake his own kidnapping.) He was sentenced to serve a 25-year prison sentence and died in prison by cyanide poisoning in 1986.

But the bigger story about Franklin National was the boring one. The bank, which was the 20th-largest in the U.S., was the first major financial institution whose wind-down was orchestrated by federal regulators. In 1974, the biggest questions federal authorities faced were how much it would damage the global economy if Franklin collapsed, and whether regulators should get involved.

Sound familiar?

It should: A similar crisis occurred in 2008 when the collapse of the largest American financial institutions seriously damaged the global economy. Much like Lehman Brothers, JPMorgan Chase and Goldman Sachs, Franklin National was deeply enmeshed in the global economy. In both 1974 and 2008, federal regulators were in a position to take decisive action, but they responded in very different ways.

In 1974, as Franklin began to collapse, the Federal Reserve’s strategy was to lend it money in order to buy time for a bigger strategy, according to Joan Spero, author of The Failure of the Franklin National Bank: Challenge to the International. The Fed loaned Franklin a total of $1.75 billion, the largest bailout ever offered to a member bank at the time. Later, the Federal Deposit Insurance Corporation stepped in to help arrange a bank takeover. The FDIC set up negotiations with 16 banks, and a firm called European-American ultimately purchased Franklin for $125 million. The bottom line is that regulators helped to avoid an economic hit by lending Franklin money, and then smoothly transitioning the bank into a subsidiary of a functional institution.

“The entire financial world,” Arthur Burns, the chairman of the Federal Reserve Board, told TIME shortly after, “can breathe more easily, not only in this country but abroad.”

A very different scenario emerged in September 2008. The United States was on the cusp of the worst recession since the 1930s, and Lehman Brothers, the nation’s fourth-biggest bank, was in trouble. Granted, the problem was much more serious in 2008 than in 1974, and the stakes were higher — as would have been the size of the required bailout. The Fed ultimately allowed Lehman brothers to go bankrupt, and the economy seized up. (A sale to Barclays did look possible at the last minute, but it didn’t work out.) A litany of critics have suggested that the Fed should have orchestrated a Franklin National Bank-like wind-down for Lehman, and thereby could have prevented an international catastrophe.

“For the equilibrium of the world financial system, this was a genuine error,” Christine Lagarde, France’s finance minister at the time, said in the days after Lehman’s bankruptcy, reports the New York Times. Indeed, what followed in the U.S. was the worst recession since the Great Depression.

Still, federal regulators tend to come under a lot of fire when things go wrong — no matter what they do, which is kind of the point. Even in 1974, TIME criticized federal authorities for not being proactive enough with Franklin National Bank, despite its orderly purchase by European-American. In its story published in October of that year, TIME said federal authorities should have scrutinized Franklin and others more closely:

Faced with the failure of more than 50 federally insured banks in the past decade, the FDIC and other regulatory agencies need to keep a much closer watch not only on the roughly 150 banks on the FDIC’S “problem” list but also on virtually every bank in the nation. That way ailing banks will stand a better chance of being helped long before they reach a Franklin finale.

In other words, TIME’s message to federal authorities was: Be vigilant and act quickly. It’s a mantra we could learn something from today.

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