Another Bank Gets Spanked Over Mortgage Securities

Years after the fact, the hammer is continuing to fall on banks that didn’t conduct themselves well during the financial crisis. Wells Fargo (NYSE: WFC  ) is to pay more than $6.5 million to settle allegations from the Securities and Exchange Commission that it didn’t adequately inform clients about the risks of some of its mortgage-backed securities. No one likes being fined but, at least this unhappy chapter is about to end for the bank and its shareholders, not to mention its clients.

Don’t trust your broker
Like many banks of that era, Wells Fargo enthusiastically recommended investments tied to mortgage-backed securities to its clients. Unfortunately, also true to the times, the company seemingly let its enthusiasm get ahead of itself. According to the SEC, it sold those goods "without fully understanding their complexity or disclosing the risks to investors."

The entire financial industry had -- and has -- egg on its face from its collective actions during the crisis, which are by no means limited to misadventures with mortgage securities. This bad behavior is indicated by the sheer amount of the fines handed down so far by the SEC, which total nearly $2.2 billion. That amount, by the way, is more than the net profit posted by more than a few big-name banks last year, not the least of which is noted SEC crisis-era miscreant Bank of America (NYSE: BAC  ) .

Looked at in the scope of the overall crisis aftermath, Wells Fargo dodged a few bullets. Paying $6.5 million for a bank of its size is chump change, particularly when matched against what others were penalized. Wells allegedly failed to do its due diligence before recommending the investments. It’s not in the super bad guy category that the SEC says "concealed from investors risks, terms, and improper pricing in CDOs and other complex structured products."

Scofflaws in this group include: Citigroup (NYSE: C  ) , which is alleged to have misled investors about a not-small $1 billion CDO, and is currently facing a $285 million settlement with the Feds for its conduct, on top of a $75 million slap it’s already paid for shenanigans related to subprime mortgage asset exposure; JPMorgan Chase’s (NYSE: JPM  ) J.P. Morgan Securities unit, now recovering from a $154 million settlement for not being forthright with customers regarding a particular mortgage securities transaction; and Big Daddy, Goldman Sachs (NYSE: GS  ) , currently swallowing a bitten bullet after it agreed to pay the Commission a record $550 million fine for effectively lying about one of its products tied to subprime mortgages.

For its relatively lighter sin of pushing mortgage-related bad stuff ignorantly, Wells Fargo lands closer to the bottom of the list in terms of penalties. Its fine -- which, by the way, is to be paid by the bank, even though it’s not admitting or denying the SEC’s allegations -- is more or less in line with companies alleged to have engaged in lesser misconduct.

Tiny drops in the bucket
The relatively light fine is likely one big reason why Wells Fargo stock wasn’t hit hard -- or much at all --by the news. Relief was probably the dominant emotion of the bank’s investors following the suit, who can now look forward instead of glancing back in worry, as the SEC breathes down their necks.

The number $6.5 million is lower than any significant item on the bank’s income statement or balance sheet. Even on the basis of its most recent quarter, the amount is dwarfed by net interest income ($11 billion) and bottom line ($4.6 billion). The penalty amount doesn’t even come close to what the company will be paying in dividends ($1.16 billion or so) for its most recent quarter.

Meanwhile, bottom line is good (although it’d be nice if revenue started growing again), the stock is teasing its two-year high, and out of the 35 analysts who track the company, 26 rate it some form of “buy.”

No shareholder likes it when their company is zapped for a penalty, and Wells Fargo needs to be more prudent and less reckless going forward. If it can do so, and keep on the clean side of the law, it might put the past behind it and enjoy a bright future.

Some argue that it’s a good time to buy into banks, now that the crisis is (hopefully) behind us. To find out what you need to know about Wells Fargo, click here for a free copy of The Motley Fool’s special report, The Only Big Bank Built to Last.

Fool contributor Eric Volkman owns no stocks mentioned in the story above. The Motley Fool owns shares of JPMorgan Chase, Wells Fargo, Bank of America, and Citigroup. Motley Fool newsletter services have recommended buying shares of Wells Fargo and Goldman Sachs Group. Motley Fool newsletter services formerly recommended JPMorgan Chase. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1991490, ~/Articles/ArticleHandler.aspx, 11/22/2014 4:06:47 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 5 hours ago Sponsored by:
DOW 17,810.06 91.06 0.51%
S&P 500 2,063.50 10.75 0.52%
NASD 4,712.97 11.10 0.24%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

11/21/2014 4:02 PM
BAC $17.12 Up +0.12 +0.71%
Bank of America CAPS Rating: ****
C $53.66 Up +0.14 +0.26%
Citigroup Inc CAPS Rating: ***
GS $189.59 Down -0.16 -0.08%
Goldman Sachs CAPS Rating: ****
JPM $60.45 Up +0.33 +0.55%
JPMorgan Chase & C… CAPS Rating: ****
WFC $53.81 Up +0.33 +0.62%
Wells Fargo CAPS Rating: ****

Advertisement