U.S. News

California looks past Wells Fargo suspension in awarding bank $500 million deal

Key Points
  • Wells Fargo providing state of California with line of credit to help with Oroville Dam repair costs
  • Bank won new business despite suspension announced in September by state Treasurer
Heavy equipment moving rocks for use in an attempt to repair damaged spillway at Lake Oroville Dam in Oroville, Calif., on Feb. 13, 2017.
Brian van der Brug | Los Angeles Times | Getty Images

The state of California just awarded a $500 million deal to Wells Fargo Bank, perhaps a sign the state is ready to move past the sanctions it slapped on the bank last year.

The bank is providing the state with short-term funds to cover repairs at Oroville Dam, which was damaged earlier this year after major erosion to its emergency and primary spillways.

CNBC has reached out to Wells Fargo for comment.

Treasurer John Chiang — the state's top banker — has been critical of Wells Fargo previously for setting up fake accounts without the permission of customers. In fact, Chiang announced in September he would suspend the state's relationship with Wells Fargo and one month later came on CNBC saying the resignation of the bank's CEO was still not enough.

Tim Schaefer, deputy treasurer for public finance at the Treasurer's office, said in a telephone interview Monday the decision to get a loan from Wells Fargo essentially came down to better deal terms.

"What he (the Treasurer) didn't do last September – and we didn't encourage the Department of Water Resources to do it either – was to reject a financially advantageous arrangement that was obtained through a competitive bid process and which resulted in lower costs to California," said Schaefer.

"To refuse to do that kind of business with them would be to punish California, not the bank."

Nearly $70 million has already been drawn from the available line of credit. Under the credit terms, the amount borrowed can reach up to $500 million, but must be repaid within a year.

According to Schaefer, the Treasurer's moratorium announced in September was on certain types of business with Wells Fargo, but also one where the Treasurer "gets to choose what we're doing with Wells Fargo."

Specifically, the Treasurer's suspension announced last fall applied to three areas: the state buying investment securities from the financial institution, using them to sell the state's bonds, and purchasing securities that are issued by Wells Fargo.

Schaefer said the Treasurer in September sought to "send a message that he doesn't condone or encourage — and in fact is outraged — by bad behavior from a financial institution that hurts Californians."

As for repair work at Oroville Dam, the state last month awarded a contract to Nebraska-based Kiewit for repair work on the dam's emergency and primary spillways. The employee-owned firm's bid was just over $275 million.

The state also incurred more than $100 million in costs earlier this year as workers dropped boulders and concrete into holes created by the damaged emergency spillway. Engineers and crews also removed debris below the spillways to allow water to flow from the channel and to reopen a hydroelectric power facility at the dam.

California could eventually get reimbursed for the Oroville crisis with federal funds from the Federal Emergency Management Agency. Still, it is unlikely the federal government will fund all the Oroville costs.

Any uncovered repair costs not paid by FEMA, though, are expected to be financed through long-term bonds repaid by user fees from the roughly 20 million Californians who receive water from local contractors through the State Water Project.