Wells Fargo Settles With Wachovia Investors for $590M

(August 5, 2011) — Wells Fargo — the biggest US home lender — has reached a $590 million agreement to settle a class-action lawsuit with investors in Wachovia securities that were sold between 2006 and 2008.

During that period, Wachovia — which was acquired by Wells Fargo during the financial crisis of 2008-2009 — sold more than $35 billion in securities, according to the lawsuit.

The settlement would end a 2008 suit that charges Wachovia with misleading investors in its bonds and preferred securities. The suit claims that Wachovia understated losses and omitted other facts associates with risky mortgages in order to prop up its stock price.

“Wachovia’s offering materials materially and repeatedly misstated and failed to disclose the true nature and quality of Wachovia’s mortgage loan portfolio, and materially misled investors as to the company’s exposure to tens of billions of dollars of losses on mortgage-related assets,” the complaint had alleged, the Wall Street Journal reported.

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The investors — including several New York City pension funds for teachers, police, firefighters and other employees — maintain in the suit that Wachovia repeatedly claimed its mortgage loans were made with high underwriting standards even though the bank lent using risky policies.

“We settled this in order to avoid the distraction, risk and expense of ongoing litigation,” a Wells Fargo spokeswoman told the WSJ. “The settlement does not constitute an admission by Wells Fargo of any liability or violation of law by Wachovia.”

According to a statement today from law firms representing the plaintiffs, accounting firm KPMG LLP, which did auditing work for Wachovia and was also listed as a defendant, reached a $37 million settlement. “We’ve agreed to settle to avoid the cost of litigation and to put this matter behind us,” George Ledwith, a KPMG spokesman, said in a phone interview with Bloomberg.

Other banks have been sued by pensions over their alleged improper business practices during the financial crisis. Earlier this month, a group of 15 prominent institutional investors sued Bank of America (BofA) for its subsidiary Countrywide Financial’s alleged improprieties involved with the sale of mortgage-backed securities. The group, including BlackRock, the California Public Employees’ Retirement System (CalPERS), T Rowe Price Group, TIAA-CREF, and some in Europe, sued BofA in Los Angeles federal court, after deciding not to join a $624 million settlement that a court approved in February.

The 15 institutional investors’ lawsuit is not the first legal challenge to BofA’s proposal to end litigation with Countrywide investors. On July 5, a group of 11 mortgage-bond investors calling themselves Walnut Place filed a challenge in New York County Supreme Court attacking the July deal’s fairness.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

(August 5, 2011) — Aggravated by fears over eurozone debt and lagging economic growth, global stock markets have tumbled in the past week — but commentators are urging pension schemes to stay calm, making sure they maintain a long-term view and don’t fuel the fire.

“I think there’s a short-term and a long-term realization for institutional investors,” Michael Dunn, Chief Research Officer of TruColor Capital Management, told aiCIO. “Short-term, there’s panic and an instinctive flight to risk-aversion.”

Since July 26, equity markets across the world have lost more than $4.5 trillion in value.

Among the 10 industries in the S&P 500, energy and raw materials declined most steeply, losing more than 5%. Meanwhile, oil dropped 5.8% to $86.63 a barrel.

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The dramatic market slide is reportedly instigating speculation that the Federal Reserve will start another stimulus program, while the European Central Bank has resumed bond purchases and offered banks additional cash to thwart the spread of the debt crisis, Bloomberg reported.

“Once you get past the shorter-term risks, institutions need to focus on how they’re going to fund their liabilities in an environment where interest rates will stay low in the foreseeable future,” said Dunn, noting that investors have few alternatives to the returns of equity investing. “Institutions that have cut back on equities will soon have very little choice but to go back to equities because those returns won’t come from any other asset class, so it may be that institutions will be more receptive to new, alternative ways to get that equity exposure,” he added.

Earlier this week, Bill Gross of the Pacific Investment Management Co. (PIMCO) asserted that the US economy is at the ‘tipping point’ of a recession. In an interview with Bloomberg Television, he asserted: “We are at what we call a stall speed, in which corporate profits don’t grow, jobs aren’t created and therefore the economy sinks.” Additionally, Gross said that the debt-ceiling deal is a “Republican Tea Party victory,” following PIMCO co-CEO Mohamed El-Erian’s comments that a debt deal will only bring temporary relief.

The reminder to pension funds to maintain a long-term view in the face of volatility highlights findings from a report released earlier this year by the World Economic Forum, which cautioned on the risks for long-term investors. In a report headed by 19 major pension and private investment funds, the World Economic Forum (WEF) has warned that policy and investor changes are instrumental in driving the growth of long-term investments.

“This report is directly helpful to institutional investors because it will highlight the challenges inherent to long-term investing and makes recommendations how to address them,” Max von Bismarck, director and head of investors of the World Economic Forum and co-author of the report, told aiCIO in March following the release of the report. “We’re trying to understand long-term investors in today’s market, how they differ in their abilities to execute long-term strategies, and what constrains them,” he said, adding that while the need for long-term capital is rising, the ability to make long-term investments is dwindling. According to von Bismarck, the financial crisis has spurred questions about whether short-term objectives of institutional investors have outweighed long-term growth and value creation. “We’ve seen shorter and shorter holding periods as investors face increasing long-term constraints.”

According to von Bismarck, long-term investors are crucial for the global economy, acting as counter-cyclical forces in markets during times of high volatility, solving decaying infrastructure problems around the world, and helping to transition effectively from a high carbon to low carbon economy.

He added: “The financial crisis has raised questions about liabilities, as a lot of funds underestimated their true liabilities under stress. A number of endowments, for example, underestimated the amount they needed to contribute to university budgets and faced a real liquidity crisis, which has pushed all types of funds to review their investment beliefs,” he told aiCIO.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742