In what comes as a welcome relief for
Wells Fargo
(
WFC
) and its investors, the U.S. Securities & Exchange Commission
(SEC) has decided to drop its inquiry into the bank's alleged
misrepresentation of facts while selling mortgage-backed securities
worth around $60 billion. The SEC had announced the investigation
early this year, and had also involved the federal court in
procuring requisite information from the bank in March (see
Wells Fargo Takes Heat From SEC in $60 Billion RMBS
Investigation
). Unlike its peers Bank of America (
BAC
) and JPMorgan Chase (
JPM
) who are jousting with a long list of mortgage-backed securities
(MBS) related lawsuits, Wells Fargo has no similar lawsuit filed
against it. And with the SEC's investigation being closed, the bank
has essentially been given a clean sheet about its conduct in
securitizing mortgages before 2008.
We maintain a
$37 price estimate for Wells Fargo's stock
, which is at a premium of under 10% to current market
prices.
See our complete analysis of Wells Fargo here
The SEC's investigation into Wells Fargo's mortgage
securitization practices between September 2006 to early 2008
was a major source of worry because of the bank's significant focus
on the mortgage business over recent years. This is because of two
reasons:
- The immediate fear of litigation and settlement-related fees
which Wells Fargo would potentially have to shell out as a result
of the lawsuit that the investigation could spawn. This would
increase Wells Fargo's non-interest expense considerably when
such charges are imposed - hitting profitability for the bank
which has seen record profits over the last few quarters.
- In our opinion, the bigger concern rising from the
investigation was its impact on Wells Fargo's stature in the
mortgage industry. As seen in the chart below, mortgages
contribute to nearly a quarter of Wells Fargo's total value. And
any signs of wrong-doing established by the SEC would have
severely tarnished the bank's reputation in the industry - making
it difficult for it to originate or service mortgages. Moreover,
such a discovery would also call to question the underlying
quality of its huge mortgage portfolio, hitting investor
confidence in the country's largest bank in terms of market
capitalization.
Wells Fargo is the second bank which saw the mortgage-related
inquiry against it dropped by the SEC, after Goldman Sachs (
GS
). JPMorgan Chase and Credit Suisse (
CS
) were not so lucky, though, with the two banks entering into
settlements totaling $417 million with the SEC this month.
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