Wells Fargo's admission that thousands of its bank employees opened over two million fraudulent consumer accounts “is a legal and ethical outrage that cannot go unpunished,” says California State Treasurer John Chiang. In response, in a letter to the bank’s embattled CEO and board of directors, he has directed the state to immediately suspend any financial relationships it has with the institution.

As the state’s banker, the Treasurer’s office oversees nearly $2 trillion in annual banking transactions, manages a $75 billion investment pool, and is the nation’s largest issuer of municipal debt. It partners with financial institutions, including Wells Fargo, to meet the state’s investment and borrowing needs.

California’s sanctions against the bank include: suspension of investments by the Treasurer’s Office in all Wells Fargo securities; suspension of the use of Wells Fargo as a broker-dealer for purchasing of investments by his office; and suspension of Wells Fargo as a managing underwriter on negotiated sales of California state bonds where the Treasurer appoints the underwriter.

 The sanctions, effective as of Sept. 28, will remain in place for the next twelve months.

“To borrow from Albert Einstein, ‘Whoever is careless with the truth in small matters cannot be trusted with [larger] matters.,’” Chiang wrote. “In the case of Wells Fargo, how can I continue to entrust the public’s money to an organization which has shown such little regard for the legions of Californians who have placed their financial well-being in its care?”

Wells Fargo is expected to comply with all of the terms of the consent orders it has entered with the Consumer Financial Protection Bureau, the Los Angeles City Attorney, and the Office of the Comptroller of the Currency. These consent orders include full reparations to the victims and making changes in its policies and procedures to ensure that such practices do not recur. Chiang’s warns the bank that if it fails to demonstrate compliance with the Consent Orders, or evidence surfaces that it has engaged in the same behavior,” it will face tougher sanctions up to and including complete and permanent severance of all ties between the Treasurer’s Office and Wells Fargo.”

In the meantime, Chiang said he will work with board colleagues at the California Public Employees’ Retirement System and the California State Teachers’ Retirement System to pursue governance reforms. Combined, the two pension systems have more than $2.3 billion invested in Wells Fargo fixed income securities and equity.

 Specifically, he will seek the following:

Separation of the chief executive and chair positions.

Appointment of a consumer ombudsman or confirmation that such a position exists, with detailed information on the position’s authority and role within the organization.

Development of an anonymous ethics reporting process and whistleblower protection program.

A review of Wells Fargo’s compensation practices.

“Clawbacks” of compensation for executives most directly linked to Wells Fargo’s deceptive and predatory sales practices.

This isn't the first time California’s Treasurer has taken on a Wall Street bank. In May 2015, Chiang banned the U.S. subsidiary of HSBC from participating in California’s $6.5 billion deposit program after receiving reports of money laundering and tax evasion.

“The problems at Wells Fargo and HSBC are not isolated cases but are indicative of a growing breakdown of integrity in the culture of our financial institutions,” Chiang said, announcing the formation of a task force—comprised of academics, financial regulators, and consumer advocates—that will be tasked with crafting actionable recommendations to federal and state policymakers about how to reform the banking industry. These reforms will focus on eliminating deceptive marketing, racially discriminatory lending practices, unnecessary fees, illegal kickbacks, and other abusive practices.