Wachovia, Golden West Investigated by Prosecutors, Regulators

Washington Post
By Karen Gullo and David Scheer

Nov. 20 (Bloomberg) — U.S. prosecutors and the Securities and Exchange Commission are investigating Wachovia Corp.’s mortgage lending and disclosures to investors, U.S. Attorney Joseph Russoniello said.

Prosecutors are examining whether Golden West Financial, the lender Wachovia bought for $24 billion in 2006, fraudulently pushed borrowers into expensive loans or altered paperwork to get them approved, Russoniello said in an interview yesterday. His office and the SEC are scrutinizing statements the banks made to investors about Golden West’s loans, he said.

Wachovia was pushed by regulators in September to merge with a stronger bank amid mounting losses from $120 billion in payment-option adjustable-rate mortgages, mainly acquired in the purchase Oakland, California-based Golden West at the peak of the housing boom. Investigators may focus on how vigilantly managers monitored and disclosed defaults in the loan portfolio.

“Individuals will be the focus,” said Peter Henning, a former federal prosecutor and SEC lawyer now teaching at Wayne State University Law School in Detroit. “It will look at what they knew and when they said it.”

Wells Fargo & Co., the seventh-biggest U.S. bank by assets, is buying Charlotte, North Carolina-based Wachovia for $14 billion after outbidding Citigroup Inc. last month. Wachovia has declined 88 percent in New York trading his year.

Golden West co-founder Herbert Sandler, 77, wasn’t available to comment, an assistant at his San Francisco-based foundation said. On Oct. 30, Sandler told Bloomberg Television: “I did not see how problems in the subprime market would roll into the mortgage market and then into the economy. It was not like we enriched ourselves.”

Biggest Purchase

Christy Phillips-Brown, a spokeswoman for Wachovia, SEC spokesman John Nester, and Julia Tunis, a spokeswoman for San Francisco-based Wells Fargo, declined to comment.

Wachovia bought Golden West, its biggest purchase, as a way to expand into California and Texas, two of the fastest-growing housing markets. The lender gave Wachovia $62 billion in deposits and 285 branches, including about 120 in California.

Former Wachovia Chief Executive Kennedy Thompson praised Golden West’s lending in an annual report issued Feb. 28. “With the benefit of hindsight, it is clear that the timing was poor for this expansion in the mortgage business,” Thompson said in the report. “We have reconfirmed our opinion of the quality of the Golden West franchise, its underwriting and service model.”

Wachovia officials in February said investors were exaggerating concern about home-loan defaults. Last month, Wells Fargo said losses from option-adjustable rate mortgages may reach as much as $26 billion in the next few years.

`Looking Down, Up’

“We are looking down, in terms of what borrowers were told, and we’re looking up at what investors were led to believe,” Russoniello said. He characterized the inquiry as preliminary.

Wachovia’s directors dismissed Thompson in June and in July named as CEO former Treasury undersecretary Robert Steel, who helped engineer the sale to Wells Fargo.

“Ken Thompson was an innocent in a world that was a little more complicated than he thought,” said Robert Gnaizda, general counsel at the Greenlining Institute, a public-policy group in Berkeley, California. “I think he strayed from his management model of not overpaying for acquisitions.”

The Bush administration is under mounting pressure to hold companies and executives accountable for the subprime-mortgage crisis, which has pushed millions of people out of their homes and forced the government to bail out Wall Street.

The SEC has opened more than 50 inquiries relating to credit-market turmoil, while the Federal Bureau of Investigation examines about 30 companies for possible accounting fraud in connection with subprime lending. It’s unclear whether the probe of Wachovia is part of those tallies.