News

Wells Fargo Is A Little Sorry That It Sold Securities It Knew Nothing About

Don’t do this:

One particular municipal entity had been a customer of Wells Fargo, or a predecessor, since at least 1988. This customer’s investment objectives were safety of principal and income. … Wells Fargo’s internal records for the customer’s account specifically stated that the account should not invest in MBS. In addition, applicable state law prohibited municipal entities such as this customer from investing in certain “high-risk mortgage-backed securities.”

Respondent McMurtry nevertheless selected and purchased for this municipal customer a SIV-issued asset-backed commercial paper program which was backed by MBS and related high-risk mortgage-backed derivatives. … On April 30, 2007, McMurtry selected and purchased Golden Key on behalf of the customer. McMurtry did not know what a SIV was at that time he selected Golden Key for his customer. Further, he did not read the PPM for Golden Key, nor did he inform the customer of the risks related to the SIV structure or the underlying high-risk mortgage-backed assets held by Golden Key.

Well, I mean, in his defense it seems that McMurtry had a very good excuse for not informing the customer of the risks of Golden Key, specifically that that he didn’t know what those risks were, or what Golden Key was, or presumably where he was or how he got there or how many fingers the customer was holding up.

The world is safe from Shawn McMurtry for the next six months, since he and his employer entered into a settlement with the SEC today suspending him and fining Wells $6.5 million for its unconcern with the fact that its salesmen were not particularly interested in doing their jobs and/or illiterate:

Among other things, Wells Fargo and its registered representatives did not review the commercial paper private placement memoranda (“PPMs”) for the investments and the extensive risk disclosures in those documents. Instead, Wells Fargo and its registered representatives relied almost exclusively on the credit ratings of these products, despite warnings against such over-reliance on ratings. Wells Fargo also failed to establish any procedures to ensure that its personnel adequately reviewed and understood the nature and risks of these commercial paper programs.

The SEC’s complaint is funny and it’s pretty clear that the Wells Fargo brokers selling this stuff were goons. Actually you don’t need to read about what they did to know they were goons; this tells you a lot:

Approximately ten Wells Fargo customers were holding a total of approximately $104.4 million in commercial paper issued by Mainsail, Golden Key and Rhinebridge when the defaults occurred. … Wells Fargo’s total commission in 2007 for the sale of Mainsail, Golden Key and Rhinebridge was approximately $65,000.*

So they got paid 6.2 basis points for placing $104mm of paper. There are lots of very very smart people on Wall Street who work for 6 basis points, but I submit to you that few of those people actually read private placement memos. (Many of those people are actually robots.) You get what you pay for, and salesmanship-wise six basis points will just pay for a hearty handshake and a “how’re the kids?” Reading the private placement memo is way, way extra.

Will that change now? Sure, sort of. Wells has fixed its sales practices to better handle asset-backed commercial paper, so that now when Wells Fargo sells you asset-backed commercial paper there will be at least a reasonable likelihood that someone at Wells Fargo, possibly the guy selling it to you, has looked at the disclosure for that paper, or at the very least has told you where you can look at the disclosure for that paper.**

It is less clear that these modest improvements apply to non-asset-backed commercial paper, which is of interest in part because of this:

But also because of two good things recently written about securitizations and related stuff – this St. Louis Fed piece that provides a nice overview shadow banking, and this paper by William Bratton and Adam Levitin that is a little hard to summarize but it’s basically (1) a history of some securitization-related-scandals and (2) an argument that securitizations are the apotheosis of the “nexus of contracts” theory of the firm and that law trails behind accounting in finding useful ways to put that in its pipe and smoke it. Here is a favorite quote from the St. Louis Fed:

Finally, and contrary to popular belief, this form of banking increases transparency and disclosure because banks now sell assets that would otherwise be hosted on their opaque balance sheets.

And from Bratton & Levitin:

And, despite the transactional complexity, the product brought forth [in a synthetic CDO or other structured product] is relatively simple when compared to debt securities issued by conventional operating companies. Even though the conventional operating company’s debt can be issued pursuant to a much simpler contract, market’s overall analysis will have to grapple with the factual complexity of the company and its business; there will be inevitable opaque patches in its profile. Accordingly, the bank that markets the conventional debt product will have to invest in disclosure so as ameliorate information asymmetries. Potential purchasers will have to invest in research and then go on to evaluate the notes against the yardstick of their existing portfolios; the notes may or may not fit.

A synthetic [read really “structured product”], in contrast, is completely transparent — the assets are there on a list for all to see, each rated by a credit rating agency. The autopilot contractual instructions for the SPE eliminate most operational risk.

These are things that I have often thought, particularly in reference to the abysmal performance of rating agencies in rating structured products: structured credit products are not that hard! They’re hard, sure, in some absolute sense, but they’re not harder than banks. Banks are like structured credit products only, instead of owning a bunch of securities that you can see on a list and think about and decide whether you like them, they own a bunch of securities whose identity is kept secret and whose composition can change every day through the actions of, y’know, Shawn McMurtry.

If you think it’s a bad thing that various municipalities got singed when a bunch of overlevered investments in subprime securities blew up – and you do, right? what are you, a monster? – then where do you place the blame? The municipalities? I mean, sure, absolutely, they were dopes, but their job was to be dopes – they thought they could rely on layers and layers of paid advisors who seemed to owe them something. The people who built the SIVs? Yes, they were clearly arbitraging the inattention of various other parties in order to maximize profits, so, bad on them, except: they were traders, and arbitraging others’ inattention (within antifraud rules, etc.) was their job. The rating agencies? Absolutely: they were dopes too, but their job was not to be dopes, so bad work – but bad work protected by the First Amendment.

Brokers who put unsophisticated customers into these trades are a good target: unlike structurers and raters who can hide behind legal disclosure, the brokers’ job was actually to find suitable investments, so it’s fair enough for them to get in trouble when they didn’t even try to do that. So good work on the SEC for fining them – and for fining them an amount that, while pretty small, is still 100x what they made on selling this paper.

Still, it’s a little unsatisfying, because while these brokers were a weak link they’re also not a really reparable link: “suitable” is actually a pretty low standard, and while you can regulate minimum competence for these brokers – you can make them read the PPM – you can’t make them read it critically, and you certainly can’t make them make the right decisions for their clients. Six basis points certainly doesn’t buy the right decision.

If the Wells salespeople here had read the “approximately 20-30 pages of risk disclosures” that the SEC found in the private placement memos for these bad SIVs, what would they have done about it? I dunno, maybe they’d have told their clients to invest in more traditional commercial paper, like that issued by Wells Fargo. WFC’s annual report risk factors only run 15 pages, and it’s just about imaginable that they would’ve replaced their “just pick the highest yield at a given rating” heuristic with “just pick the highest yield at a given number of pages of risk factors.” Or something else. More likely, they’d have read the disclosure, nodded gravely, realized that (1) these things were complicated but (2) people at a ratings agency who were actually paid to examine their creditworthiness had rated them A-1/P-1 and (3) they had a higher yield than similarly rated non-complicated things. Perhaps the Wells Fargo municipal-client commercial paper sales desk would have been in the minority of people who saw the storm coming in subprime securitizations and would have saved their clients from investing in them. But, no.

SEC Charges Wells Fargo for Selling Complex Investments Without Disclosing Risks [SEC, and complaint (pdf)]
Bratton & Levitin: A Transactional Genealogy of Scandal: from Michael Milken to Enron to Goldman Sachs [SSRN]
Is Shadow Banking Really Banking? [St. Louis Fed]

* Before you’re all “yeah, but what did they make in 2006?,” those SIVS came on the market in 2007.

** From the complaint again: “The steps include: (1) a Wells Fargo Asset-Backed Commercial Paper Permitted List wherein the offering documents for asset-backed commercial paper are reviewed by money market traders and a limited number of commercial paper products are permitted for sale to institutional customers; (2) enhanced supervisory procedures related to the assessment of product knowledge by registered representatives in the relevant designated sales force who sell commercial paper to municipalities; (3) quarterly meetings attended by the heads of each fixed income trading desk, the national sales manager and representatives of the compliance department during which products sold to municipal and other customers and developments in those product types are reviewed as are the relevant trading desk reports on variations or modifications in the market that presently raise or are expected to raise materially new or different risks or that exhibit other characteristics that may require reassessment of the sales force’s understanding of the product; and (4) the practice of delivering, or providing electronic access to, copies of offering materials to purchasers of asset-backed commercial paper.”

118 comments
(hidden for your protection)
Show all comments

118 Responses to “Wells Fargo Is A Little Sorry That It Sold Securities It Knew Nothing About”

  1. G Costanza says:

    Was that wrong? Should I not have done that? I tell you, I gotta plead ignorence on this thing, because if anyone had said anything to me at all when I first started here that that sort of thing is frowned upon… you know, cause I've worked in a lot of offices, and I tell you, people do that all the time.

  2. STAR says:

    "There are lots of very very smart people on Wall Street who work for 6 basis points, but I submit to you that few of those people actually read private placement memos. (Many of those people are actually robots.) "

    Unfortunately, 6 basis points of nothing is still whirppp boop!*## ZIRP!!! nothing:(

  3. Guest says:

    What's a SIV?

  4. CDO-guy says:

    Holy C, Matt!!! 13+ paragraphs fop 65k made on 104mm??! AND a graph???!

  5. Guest says:

    Sounds like a typical Fixed Income Salesperson. What's the big deal?

  6. FEC Legal Scholar says:

    This guy is a complete blathering moron. Why not assert the always successful defense of mental defect due to ingestion of cat food?

  7. PermaGuestII says:

    Probable conversation with client, circa Q1 '07:

    [WFC salesman]: "Well, I can offer you 30-day UPS CP at libor flat"

    [Client's Assistant Treasurer]: "Hahaha- no way. My guy at Lehman is showing me A-1+/P-1 paper at L+20"

    [WFC salesman]: "Hang on" (puts client on hold, calls trader) "Hey- Joe- what the fuck is with these yields? My guy's going to pull his money out of here and give it to Lehman unless we show him can something at L+20!"

    [WFC trader] "Well– I've got this Rhinebridge stuff– can offer at L+30"

    [WFC salesman] "Perfect" (puts trader on hold, picks up client) "I can offer you 30-day Rhinebridge Funding at L+25"

    [Client's assistant treasurer] "Now *that's* more like it. I'll take $25 million."

    • guest says:

      I chuckled because I was there

      • Tseug says:

        Those were the days. Getting beat up because you couldn't offer a vertical slice / C-3 tranche to a customer for 5bp wider than the next guy – the customer needed to be "paid for the risk!"

  8. Hopeful Nell says:

    I hope there's a second Matt post today about how all these 13F filings are NBD because you know like, just index it all, burn some cash every quarter and whatevs, HMD.

  9. guest says:

    What's wrong with 6 bps?
    -Citco employee

  10. guest says:

    Individual is in violation of Section C (Suitability) of the CFA Code of Conduct

  11. MHA says:

    But client did adhere to Section D (Dumbass) of the Wall Street Rules of Engagement.

  12. lorielevine says:

    In 2003 and 2004 Wells Fargo corporate Trust Services of Minneapolis became a "reorganizationtrustee" for the investors of American Business Financial Services(a nasdaq corp). Wells halved each investment, dividing it into preferrd stock and senior investment notes. in Jan. of 2005(only 6mos later for some), the company filed for bankruptcy, at which time Wells FArgo became the bankruptcy trustee!!!! Of course the notes converted to stock were worthless. 7 years have passed and over$700 million have been lost and misappropiated! The SEC and DOJ have not seen fit to prosecute the company or the trustee.

  13. Great work! This is the type of information that should be shared around the web. Shame on Google for not positioning this post higher! Come on over and visit my web site . Thanks =)

  14. crork says:

    a3H8dR I think this is a real great blog article. Awesome.

  15. BritteRezf says:

    I used to be very pleased to find this internet-site.I wished to thanks for your time for this glorious read!! I undoubtedly enjoying each little little bit of it and I’ve you bookmarked to check out new stuff you weblog post.

  16. Hey there! This is kind of off topic but I need some help from an established blog. Is it very hard to set up your own blog? I’m not very techincal but I can figure things out pretty fast. I’m thinking about making my own but I’m not sure where to begin. Do you have any tips or suggestions? Cheers

  17. ArdraBarrb says:

    Its like you read my mind! You appear to know a lot about this, like you wrote the book in it or something. I think that you could do with some pics to drive the message home a little bit, but other than that, this is excellent blog. An excellent read. I’ll certainly be back.

  18. Hi! Would you mind if I share your blog with my myspace group? There’s a lot of folks that I think would really enjoy your content. Please let me know. Cheers

  19. I have been exploring for a little bit for any high quality articles or blog posts on this kind of area . Exploring in Yahoo I at last stumbled upon this web site. Reading this info So i’m happy to convey that I have an incredibly good uncanny feeling I discovered just what I needed. I most certainly will make sure to do not forget this web site and give it a glance on a constant basis.

  20. It’s laborious to find knowledgeable individuals on this subject, however you sound like you understand what you’re speaking about! Thanks

  21. e-liquid says:

    Hey, thanks for the blog post.Thanks Again. Great.

  22. South Shore says:

    Very good article post.Really thank you! Want more.

  23. wonga loans says:

    Im grateful for the article.Thanks Again. Will read on…

  24. Im thankful for the blog. Want more.

  25. I have been checking out a few of your articles and i can state clever stuff. I will surely bookmark your site.

  26. I’ve been exploring for a little bit for any high-quality articles or blog posts on this sort of area . Exploring in Yahoo I at last stumbled upon this website. Reading this info So i’m happy to convey that I have an incredibly good uncanny feeling I discovered exactly what I needed. I most certainly will make sure to don’t forget this site and give it a glance regularly.

  27. Left on my site a link to this post. I think many people will be interested in it..!

  28. Very neat blog article.Really thank you! Much obliged.

  29. golf says:

    Fantastic article post.Much thanks again. Keep writing.

  30. Hey There. I discovered your blog using msn. This is a very smartly written article. I will make sure to bookmark it and come back to learn more of your helpful information. Thank you for the post. I will certainly return.

  31. You made some decent points there. I regarded on the web for the issue and located most people will go along with together with your website.

  32. Thanks so much for the blog.Really looking forward to read more. Want more.

  33. Self Defense says:

    I really like and appreciate your blog post. Fantastic.

  34. Major thanks for the post.Thanks Again. Much obliged.

  35. Oh, so you just sat down and pumped out this skirt? How do you do that? I envy your clothes-making skillz.
    And I know I am horribly late and I am shame-faced because you were dead on with mine, but happy birthday!!!!!

  36. I appreciate, lead to I discovered just what I used to be looking for. You have ended my 4 day lengthy hunt! God Bless you man. Have a nice day. Bye

  37. Attractive part of content. I simply stumbled upon your web site and in accession capital to claim that I acquire actually loved account your blog posts. Anyway I’ll be subscribing on your augment or even I achievement you access persistently rapidly.

  38. I have seen that clever real estate agents all over the place are warming up to FSBO Advertising and marketing. They are seeing that it’s more than merely placing a poster in the front property. It’s really concerning building relationships with these dealers who at some point will become customers. So, if you give your time and energy to supporting these suppliers go it alone – the “Law regarding Reciprocity” kicks in. Interesting blog post.

  39. nopal juice says:

    Im grateful for the article post.Much thanks again. Keep writing.

  40. F*ckin’ tremendous things here. I’m very satisfied to look your article. Thank you so much and i’m taking a look forward to contact you. Will you kindly drop me a e-mail?

  41. Oh yes and the sun i shining way too Wonderful deal! Looking forward to seeing more

  42. I have been reading out many of your articles and it’s pretty nice stuff. I will surely bookmark your site.

  43. great post, very informative. I wonder why the other experts of this sector don’t notice this. You should continue your writing. I am confident, you have a great readers’ base already!

  44. I know of the fact that currently, more and more people are now being attracted to digital cameras and the discipline of digital photography. However, really being a photographer, you should first devote so much time period deciding the exact model of digicam to buy plus moving store to store just so you could potentially buy the lowest priced camera of the trademark you have decided to select. But it won’t end right now there. You also have to take into account whether you should obtain a digital dslr camera extended warranty. Thanks alot : ) for the good guidelines I acquired from your blog.

  45. the AC books, the AC workshops, the AC staff, the AC web-site, the AC blog,…AC on Pinterest…my oh my! Thank you Lord…pass the needle & thread and fabric & scissors!

  46. voiles says:

    I appreciate you sharing this article.Thanks Again. Much obliged.

  47. Major thanks for the blog post.Thanks Again. Want more.

  48. Model says:

    Fantastic article.Really thank you! Awesome.

  49. Thank you for your blog post.Really thank you! Awesome.

  50. Major thanks for the blog.Really thank you! Really Great.

  51. meanwell psu says:

    Major thankies for the blog article. Cool.

  52. I cannot thank you enough for the article post. Will read on…

  53. This is one awesome article.Really looking forward to read more. Really Great.

  54. cash advance says:

    Great, thanks for sharing this article post. Keep writing.

  55. Thanks a lot for the article post.Really thank you! Really Cool.

  56. James says:

    The next time I read a weblog, I hope that it doesnt disappoint me as a lot as this one. I mean, I do know it was my option to learn, however I truly thought youd have one thing fascinating to say. All I hear is a bunch of whining about one thing that you can fix when you werent too busy on the lookout for attention.

  57. Muchos Gracias for your blog.Thanks Again. Really Cool.

  58. Enjoyed every bit of your article post. Will read on…

  59. paskolos says:

    Wow, great blog.Thanks Again. Want more.

  60. Great, thanks for sharing this post.Thanks Again. Will read on…

  61. Thanks for the news! Just was thinking about it! By the way Happy New Year to all of you:D

  62. Thanks for the blog article.Thanks Again. Really Cool.

  63. Major thanks for the post. Fantastic.

  64. Sex Inserate says:

    I think this is a real great article post.Really looking forward to read more. Will read on…

  65. Say, you got a nice article post.Thanks Again. Really Great.

  66. j68e6f I appreciate you sharing this article.Really thank you!

  67. cleveland OH says:

    Fantastic article post.Thanks Again. Will read on…

  68. Say, you got a nice blog article.Really looking forward to read more. Awesome.

  69. eatseed says:

    Hey, thanks for the article post.Thanks Again.

  70. I loved your post.Thanks Again. Will read on…

  71. fashion says:

    Wow, great blog post.

  72. funny post says:

    Great blog.Much thanks again. Will read on…

  73. Thanks for sharing, this is a fantastic post.Really thank you! Cool.

  74. I really like and appreciate your article post. Will read on…

  75. A round of applause for your blog article.Much thanks again.

  76. Awesome article post.Much thanks again. Really Cool.

  77. Wow, great article post. Much obliged.

  78. Really informative article post.Really thank you! Fantastic.

  79. commissions says:

    Great blog. Want more.

  80. wow, awesome blog article.Thanks Again. Will read on…

  81. Jeremy Scott says:

    Thanks for helping me to achieve new strategies about pc’s. I also have belief that one of the best ways to keep your notebook in leading condition is by using a hard plastic material case, or maybe shell, that suits over the top of the computer. A majority of these protective gear will be model targeted since they are made to fit perfectly over the natural casing. You can buy all of them directly from the seller, or via third party places if they are intended for your notebook, however not every laptop will have a cover on the market. All over again, thanks for your ideas.

  82. Omega says:

    This is one awesome blog post.Thanks Again. Keep writing.

  83. Thanks again for the blog.Much thanks again. Much obliged.

  84. classholes says:

    Major thanks for the blog.Really thank you! Awesome.

  85. submit says:

    Thanks a lot for the blog post.Much thanks again. Want more.

  86. Thank you for your blog article.Really looking forward to read more. Awesome.

  87. Very informative blog article.Really thank you! Will read on…

  88. Thanks so much for the article. Fantastic.

  89. Thank you for your blog post.Really thank you! Want more.

  90. A big thank you for your blog article.Really thank you! Cool.

  91. Great, thanks for sharing this blog article.Really thank you! Great.

  92. nexus 7 says:

    Thanks-a-mundo for the blog.Really looking forward to read more. Keep writing.

  93. I cannot thank you enough for the article post.Thanks Again.

  94. Poringa says:

    Major thankies for the blog.Thanks Again. Want more.

  95. Really appreciate you sharing this article post.Really looking forward to read more. Really Great.

  96. terry-brival says:

    Great, thanks for sharing this blog article. Great.

  97. best vpn says:

    Im thankful for the article.Really looking forward to read more. Awesome.

  98. Streaming TV says:

    Awesome article post.Much thanks again.

  99. Im grateful for the article post.Really thank you! Awesome.

  100. Great, thanks for sharing this blog article.Really thank you! Awesome.

  101. Funky Shark says:

    I cannot thank you enough for the blog post.Thanks Again. Will read on…

  102. Awesome post.Much thanks again. Fantastic.

  103. Very neat blog article.Really looking forward to read more. Really Great.

  104. I truly appreciate this blog.Much thanks again. Keep writing.

  105. Hey, thanks for the article.Thanks Again. Really Cool.

  106. I am so grateful for your blog article.Really thank you! Much obliged.

  107. A prostatitis patient recovered experience. I was ever been a prostatitis patient for seven years. My prostatitis cure method include seven parts, the patient can recover in one or two months with our cure. If you need help and more detail, you can send an E-mail to me.

  108. Really appreciate you sharing this post.Really thank you!

  109. Thank you for your article post.Much thanks again. Great.

  110. Thanks for the article post.Much thanks again. Keep writing.

  111. Thank you for your article.Really thank you! Much obliged.

  112. Unquestionably believe that that you said. Your favourite reason seemed to be on the net the easiest factor to be mindful of. I say to you, I definitely get annoyed whilst people think about concerns that they just don’t realize about. You controlled to hit the nail upon the top as smartly as defined out the entire thing without having side-effects , people can take a signal. Will likely be back to get more. Thanks

  113. eggmaster says:

    Hello there! This article couldn’t be written much better!
    Looking at this post reminds me of my previous roommate!

    He continually kept preaching about this. I most certainly will send this information to him.
    Pretty sure he will have a good read. Thanks for sharing!

Our Sites

  • Above the Law
  • How Appealing
  • ATL Redline
  • Breaking Defense
  • Breaking Energy
  • Breaking Gov
  • Dealbreaker
  • Fashonista
  •