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Wells Fargo & Co
Bank of America Corp
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The U.S. government is going after a further alleged scoundrel from the housing bust. The victim, as in earlier cases, is the Federal Housing Administration (FHA), which paid out millions in claims on loans that never should have been issued. What may surprise people is the alleged villain: Wells Fargo (WFC), the bank that counts Warren Buffet as its largest shareholder.
In a civil mortgage fraud lawsuit, filed on Oct. 9 in U.S. District Court in New York, Wells Fargo is accused of fraudulently approving government-backed mortgages, then turning around to collect government insurance when the dubious loans defaulted.
At first glance, one might assume this is just another symptom of the headache the bank inherited with Wachovia, the failing rival it acquired for $15.1 billion four years ago. But as my Bloomberg News colleagues Chris Dolmetsch and Dakin Campbell note, any culture at fault here would stem from Wells Fargo. The complaint points to “a longstanding and reckless trifecta of deficient training, deficient underwriting, and deficient disclosure, all while relying on the convenient backstop of government insurance,” U.S. Attorney Preet Bharara said in a statement.
When the mortgage crisis hit in 2008, Wells Fargo was viewed as one of the good guys. The bank’s conservative lending policies had helped it weather the worst of the housing bust, giving it the financial strength and stability to orchestrate the merger with Wachovia. Investors knew that the new banking behemoth, now the country’s largest home mortgage lender, would have to deal with the excesses of Wachovia—from bad loans to questionable lending practices.
Bank of America (BAC) faced similar issues when it agreed to pay $1 billion in February to settle charges of mortgage fraud in its Countrywide unit. (Earlier this year, Citigroup (C) and Deutsche Bank (DB) paid heavy fines to settle similar fraud charges.)
Now the government is alleging years of reckless loan approvals that predate the Wachovia merger. If true—and Wells Fargo says it’s not—the charge points to the breadth of the loan fervor during the housing bubble. It also points to the powerful lure of a system that gives banks authority over loan approvals while simultaneously protecting the institutions from the full pain of bad decisions.
It’s also another blow to the reputation of Wells Fargo, which has already paid penalties to settle charges that range from having pushed borrowers into subprime to having discriminated against black and Latino borrowers. As prosecutors sift through the wreckage of the housing crisis, it’s increasingly clear that no company is beyond reproach.