How did Wells Fargo take undue financial risk with investment customers?
The Star Tribune reported Banks like Wells Fargo lend clients' securities, mostly stocks, to Wall Street brokers who need them temporarily to conduct short sales and other transactions. In exchange, the borrowing brokers hand over cash collateral, which the bank invests, earning small gains for the clients lending out their securities.
But Wells Fargo's investments in asset-backed securities carried risks that led to losses in the credit crisis beginning in 2007. As losses mounted, Wells Fargo made it difficult for some investors to extract themselves from the program, so they sued.
The Judge said he found the testimony of former Wells Fargo Chairman Richard Kovacevich and CEO John Stumpf "to be almost childlike" and that he accepts "that one of the primary functions of subordinates in today's corporate America is to shield their ultimate superiors from accumulating embarrassing information."
It is ridiculous for the Chairman and former chairman to say they new nothing of the increased risk to the securities lending program. The judge also said it was clear that Wells knew of the heightened risk and put securities owned by customers at grave risk. He continued by saying that they bank breached its duty of full disclosure once its line managers were taking greater risks with the customers securities.
It is clear now that the banks have never had the best interest of anyone in mind except their own. They were happy to put everyone else's money at risk in asset backed securities knowing they would not be taking the loss, still be collected management fees and probably were buying CDS or Credit Default Swaps that would pay the bank in the event of failure to any of the ABS products.
If Wells was buying CDS against their own clients it would be a major scandal. It would not surprise me though because we have seen similar practices done by Goldman Sachs. It also wouldn't surprise me if the banks all played both sides of the ABS trade. This could have added to the increased demand for Sub Prime assest backed securities because the banks could make money on the failure of these securities through their CDS, which would pay them if the Assest Backed Security failed.
The industry was set up to allow the banks to profit whether their clients had gains or losses. They perfect market had been created for Wall Street and the Banks by Wall Street and the Banks. Unfortunately, this is also what led to collapse of the housing industry.
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