This Major Bank Just Dodged a Federal Bullet

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Can you hear that? That satisfied noise is a collective sigh of relief emanating from the headquarters of Wells Fargo (NYSE: WFC  ) . The bank just revealed the good news that the SEC won't file charges against it over its dealing in mortgage securities during last decade's financial crisis. That's a hefty weight off the big guy's broad shoulders, as similar fines have and will continue to cost rival financials hundreds of millions of dollars.

A Wells for Wells
The possibility of being fined by the SEC was very real for Wells Fargo. The Feds continue to lick their wounds from the crisis, and are still determined to punish who they consider to be the wrongdoers of that era. It's exhausting to keep track of what company's been sued by which arm of government and for how much since the penalties started to rain down.

For a while, it looked like the California bank would get a good spraying. This past February, the company was served a legal document from the SEC -- by freaky coincidence known as a Wells notice -- indicating that the regulator was considering filing civil charges against the bank. The charges concerned disclosures in some of the company's mortgage-backed securities. Remember those? It's hard to forget them; after all, they were some of the biggest sparks igniting the crisis.

The SEC clearly means business. JPMorgan Chase (NYSE: JPM  ) and Credit Suisse were the targets of similar investigations, and both were hit hard. As usual in recent cases where a determined regulatory agency goes after a big financial, Morgan and CS both chose to settle with the SEC instead of waging a long, costly legal war. The bill came to around $417 million combined.

That settlement occurred earlier this month, so the powers that be at Wells Fargo were likely expecting a resolution to their situation sooner rather than later. It's reasonable to assume that the smart money anticipated a big fine from the vengeful agency; after all, according to the SEC, the company had ignored something like half a dozen subpoenas seeking information on the matter. No doubt there will be at least a few surprised faces at the bank when the troops get the good news.

A fine mess
Most of the big crisis-era banks can afford the odd $400 million fine or class action settlement now and again. But what kind of financial concern wants to spend its money that way? Plus, these payments are really starting to add up for some of the majors.

Citigroup (NYSE: C  ) , for one, is still getting battered by the long, strong arm of the law. This past August, it closed a chunky class action suit from investors alleging that the company misled them about its financial health. It caught a big legal cold from the suit, agreeing to pay a cool $590 million to settle the thing.

That was only the latest crisis payout for the company; earlier this year, it reached a $285 million settlement with -- guess who? -- the SEC, over foolishness with mortgage bonds. And there was that little incident where it was accused of essentially tricking the government into providing insurance for mortgage loans that weren't eligible for coverage. That cost it $158 million. 

Citi not only never sleeps, it also never stops paying for its mistakes, apparently. As of a few months ago, it had shelled out or pledged a total of $2.3 billion in legal settlements, penalties and related costs over the course of a single year. And it's nowhere near done -- it estimates that such expenses could total $4 billion more.

Hopefully, a precedent
Wells Fargo has also been hit with plenty of legal actions arising from the Bad Years, and has more than paid the price. For instance, it was one of the five lenders -- along with Morgan, Citi (of course), Bank of America (NYSE: BAC  ) , and Ally/GMAC -- that agreed this past February to the government's National Mortgage Settlement. This is a package of fines combined with more indirect costs in the form of writedowns and refinancing for affected home borrowers. Wells' part in the Settlement amounts to just over $1 billion in payments to the federal and state governments, and $4.3 billion in borrower relief.

So by comparison, a few hundred million in fines for crisis-era misconduct from the SEC -- which is probably not going to top the $550 million punch it delivered to Goldman Sachs (NYSE: GS  ) in 2010 -- wouldn't have deepened Wells' hole very much. What it likely would have done more effectively is kept the gates wide open for further government penalties and lawsuits. Come on in, help yourself!

The SEC deciding not to hand down a fine is more a hope that this is the beginning of the end of the bank's lawsuit/penalty cycle. It's going to be many years before the big financials conclusively put the crisis behind them, but if this decision is any indication, Wells Fargo might just have a head start in that race.

Regardless, fines and penalties won't bring down Wells Fargo anytime soon. To find out the reasons why, we invite you to download our premium research report from one of The Motley Fool's top banking analysts. Click here now for instant access to this in-depth take on Wells Fargo.

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