Wells Fargo, Goldman May Face Charges Over Mortgage Bonds

According to this news report, Wells Fargo and Goldman Sachs may have to face federal charges related to mortgage-backed securities deals leading to the financial crisis. This shows that the government is stepping up action against the banks that packed home loans into bonds during the housing boom.

Published: Tuesday, 28 Feb 2012
By: Reuters
CNBC

Goldman Sachs and Wells Fargo may face federal enforcement action related to mortgage-backed securities deals leading into the financial crisis, the banks said in regulatory filings on Tuesday.

The disclosures are the latest sign government officials are stepping up action against banks that packaged home loans into bonds during the housing boom. The underlying mortgages later soured, spurring billions in losses for investors.

Goldman [GS 116.14 -0.97 (-0.83%) ] and Wells Fargo [WFC 31.455 0.085 (+0.27%) ] both said they received so-called "Wells notices" from the U.S. Securities and Exchange Commission. A Wells notice indicates SEC staff plan to recommend that the agency take legal action and gives a recipient a chance to mount a defense.

Goldman received its Wells notice on Feb. 24, relating to a $1.3 billion subprime mortgage-backed securities deal in late 2006 that the bank underwrote. Goldman said it will be making a submission to the SEC related to the case and communicating with SEC staff to address their concerns.

The bank has also received inquiries from governmental, regulatory bodies and self-regulatory entities concerning certain transactions Goldman entered with MF Global prior to the brokerage firm's bankruptcy filing. Goldman said it is cooperating with all such inquiries.

Reuters earlier reported that Goldman purchased $1.3 billion worth of commercial paper from MF Global days before its bankruptcy on Oct. 31.

Wells Fargo said its Wells notice related to its disclosures in offering documents for mortgage-backed securities. The bank said it is providing information requested by various regulatory agencies in connection with their investigations.

Representatives of Goldman, Wells Fargo and the SEC declined further comment.

The U.S. government is under intense pressure to show that it can hold Wall Street accountable for its contribution to the subprime housing meltdown that began in 2007.

Last month, the Obama administration set up a special task force to investigate practices related to mortgage-backed securities. A settlement this month with five major banks, including Wells Fargo, over foreclosure-related abuses allows probes of mortgage bonds to go forward.

Several banks, including Goldman and Wells Fargo, have already reached multi-million-dollar settlements with the SEC over crisis-era derivatives deals tied to subprime mortgages. The Wells notices detailed on Tuesday indicate the SEC is pursuing cases related to securitization of the underlying bonds as well.

In January, U.S. Attorney General Eric Holder said the Justice Department issued civil subpoenas focusing on mortgage-backed securities to 11 different financial institutions. He said the department had discussed the subpoenas with the SEC and added these subpoenas did not duplicate earlier requests from that agency.

Wells Fargo, the fourth-largest U.S. bank by assets, said it is also facing investigations related to home loan origination practices. San Francisco-based Wells is the largest originator of mortgages in the United States.

Last week, Citigroup [C 33.56 0.08 (+0.24%) ] said it received a subpoena from federal and state regulators seeking information about the bank's "issuing, sponsoring, or underwriting" of mortgage-backed securities.

The inquiries included a subpoena from the civil division of the U.S. Department of Justice, which Citigroup received on Jan. 27, it said in its annual report. That same day Attorney General Eric Holder said the department issued civil subpoenas to 11 financial institutions as part of a new effort to investigate misconduct in the packaging and sale of home loans to investors.

In its annual report filing last week, Bank of America [BAC 8.115 0.005 (+0.06%) ] said it has "received a number of subpoenas" from regulators and other authorities about the bank's underwriting and issuance of mortgage-backed securities.

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