Tuesday, April 5, 2011

Wells Fargo (WFC), CDOs and (C) (DB) (JPM) (MS) (UBS)

In what is an extremely dubious case that reportedly will be brought against Wells Fargo (NYSE:WFC) concerning CDOs, which would have powerful negative repercussions on shareholders in Citigroup (NYSE:C), Deutsche Bank (NYSE:DB), J.P. Morgan Chase (NYSE:JPM), Morgan Stanley (NYSE:MS) and UBS (NYSE:UBS), the Securities and Exchange Commission is reportedly about to file civil charges against Wells Fargo for allegedly overcharging investors for mortgage bonds.

Rochale Securities analyst Dick Bove responded to the probability, saying, "The bulk of the shareholders never owned Wachovia stock whatsoever. The first question that came to my mind; who really should be at risk for legal penalties?"

At issue is whether or not Wells Fargo didn't reflect the diminishing value of the underlying loans when it sold collateralized debt obligations to investors. The SEC doesn't think it did, or rather Wachovia did, at the time.

Concerning the repercussions for other banks and their shareholders, Bove concluded, "Those CDOs were sold in a market environment. If the precedent is established that an issuer has to pay up if the value of securities you sell in a market auction goes down in value, then you have a real problem for bank shareholders."

Talk about regulation and federal agencies gone awry.

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