As Ronald Reagan might have put it, here we go again.
Just nine days after the New York State attorney general's office filed suit against JPMorgan Chase (NYSE: JPM ) for securities fraud committed by its Bear Stearns unit, the U.S. Department of Justice yesterday filed suit against Wells Fargo (NYSE: WFC ) , alleging "reckless underwriting and fraudulent loan certification for thousands of FHA-insured loans that ultimately defaulted."
Out of all the big banks, and all the bad behavior exhibited by them in the run-up to the financial crash, Wells Fargo was supposed to be one of the good guys, or at the very least one of the not-so-blatantly bad guys. Is Wells Fargo becoming another Bank of America (NYSE: BAC ) ? And if so, can it withstand the kind of monetary penalization that comes with such an unwelcome honor?
Bankers gone wild
Reckless lending practices were the name of the game in the years leading up to the crash. That's how we got there: mortgage-backed securities packed with bad loans that defaulted in large enough numbers, and packed with enough financial firepower, to start bringing down the issuing banks.
And B of A was one of the big players in that game, particularly in light of its 2008 purchase of Countrywide Financial: probably the worst of the era's subprime-mortgage offenders. As such, B of A has endured a string of expensive lawsuits just this year alone, all stemming one way or another from the crash:
- Earlier this year, the bank agreed to pay $3 billion over repurchase claims for loans it had originated and sold to Fannie Mae and Freddie Mac.
- In June, B of A agreed to pay a staggering $8.5 billion stemming from "representation and warranty claims" on mortgage-backed securities assembled by Countrywide.
- Most recently, B of A settled a shareholder lawsuit to the tune of $2.4 billion for alleged misconduct in how it handled the acquisition of Merrill Lynch, a hastily arranged deal done in the pressure cooker of the crisis.
That's almost $14 billion right there, and that's not even everything.
Death by a thousand lawsuits
With $1.3 trillion in assets, Wells Fargo is the fourth-largest bank in the country. Citigroup (NYSE: C ) is third, with $1.9 trillion. B of A is second, with $2.2 trillion, right behind JPMorgan Chase and its $2.3 trillion.
So while it's not quite Bank of America big, Wells Fargo is big. In yesterday's filing, the D.O.J. is asking for about $600 million in damages and penalties. How is this likely to affect the bank? As my Foolish colleague Eric Volkman put it so perfectly just this morning: "The U.S. attorney's 'hundreds of millions' surely won't destroy the bank, but along with the other fines it's paid ... it'll feel a deleterious series-of-tiny-pinpricks effect." In other words, Wells Fargo might be facing death by a thousand cuts. And this -- along with Wells Fargo's recent $175 million settlement in response to the charge that it had racially discriminated against mortgage applicants -- might be one of the first.
This too shall pass ... probably
But just in case you've forgotten, this is election season, and even the least cynical of us can't be blamed for thinking it extremely convenient that this sudden rush of litigation (including JPMorgan's above-mentioned legal adventure) is hitting just weeks before the general elections -- much of it stemming from the Residential Mortgage Backed Security Working Group, a state and federal collaboration set up by President Obama at the beginning of this year to prosecute banks for mortgage-related fraud.
So all of this may be the last gasp to hold somebody -- anybody -- accountable for the rampant abuses committed in the run-up to the financial crash. Also bear in mind that, many times, final settlements come in at significantly lower amounts than what was originally demanded. For Wells Fargo shareholders, not used to this kind of bad press for their usually well-respected bank, let's hope so.
Thanks for reading, and for thinking. Speak of the devil, you can learn more about the most-talked-about big bank out there in our new in-depth company report on Bank of America. It details B of A's prospects and gives you three reasons to buy and three reasons to sell. Just click here to get access.