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Not so different

10 Oct 2012 By Agnes T. Crane

Wells Fargo is stuck in the mortgage mire, just like other big U.S. lenders. Warren Buffett’s favorite bank trades at a premium to U.S. rivals like Bank of America and JPMorgan, partly thanks to a carefully cultivated “not Wall Street” image. But the West Coast bank had no trouble cooking up its own questionable home loans during the housing boom.

The latest exhibit is a new lawsuit in which the Manhattan U.S. Attorney and the Department of Housing and Urban Development accuse Wells of defrauding Uncle Sam by submitting faulty loans to the government for taxpayer-backed insurance. It’s a practice that appears to have been widespread in an industry obsessed with feeding the mortgage machine in the heady few years before the financial crisis struck in 2008.

Earlier this year, BofA paid $1 billion to settle similar charges while Citigroup forked over $158 million. The “hundreds of millions of dollars” the government hopes to recover from Wells could put the nation’s fourth largest bank somewhere in the middle.

Wells is valued by investors like Buffett for avoiding many of the pitfalls that have left competitors’ market valuations languishing well below the book value of their assets. Wells stock, in contrast, is trading at more than 1.3 times book value even after the government suit. One reason is that Wells has never embraced investment banking, even after buying Wachovia in 2008. That meant it dodged some of the crisis trouble that afflicted other banks and avoided much of the euro zone-inspired volatility that has hurt rivals since then.

Yet in other ways Wells has not behaved so differently from big East Coast banks. For instance, back-office mistakes have been costly. Wells and four other banks signed onto a $25 billion settlement to put accusations of dodgy foreclosure paperwork behind them. The bank also forked over $175 million to settle charges it discriminated unfairly in how it made home loans.

In recent years, Wells’ relative health and its grounding in domestic consumer lending have helped it increase its share of the U.S. mortgage origination market to about a third as other banks have pulled back. With that kind of dominant position, the government’s latest legal move is a timely reminder that for all its distance from Wall Street, the San Francisco-based bank is hardly saintly.


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