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U.S. prosecutors and the Securities and Exchange Commission have opened an investigation into whether Wachovia Corp. misled borrowers and investors, San Francisco U.S. Attorney Joseph Russoniello said.
Prosecutors are examining whether Golden West Financial, acquired by Wachovia in 2006, fraudulently lured borrowers into mortgages, such as by switching them into more expensive loans or falsifying financial information so they could qualify, Russoniello said. His office and SEC investigators in San Francisco are also scrutinizing whether the banks misled investors about the quality of Golden West's loans, he said.
“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 in an interview Wednesday. He characterized the inquiry as preliminary.
Regulators pressed Wachovia in September to merge with a stronger bank, leading Wells Fargo & Co. to top a Citigroup Inc. bid last month to acquire the Charlotte lender for $14 billion. Wachovia became vulnerable because of expected losses from $120 billion in payment-option adjustable-rate mortgages. The loans were mainly acquired through the $24 billion purchase of Golden West, based in Oakland, Calif.
Christy Phillips-Brown, a spokeswoman for Wachovia and SEC spokesman John Nester declined to comment. Wells Fargo spokeswoman Julia Tunis Bernard also declined to comment.
Golden West co-founder Herbert Sandler wasn't available for comment, an assistant at his San Francisco-based foundation said. On Oct. 30, Sander 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.”
Wachovia shares fell 69 cents, or 13 percent, to $4.57. The shares have dropped 88 percent this year.
Wachovia bought Golden West as a way to expand into California and Texas, two of the fastest-growing markets. The lender gave Wachovia $62 billion in deposits and 285 branches, including about 120 in California.
Former Wachovia chief executive Ken 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 it expects losses of $26 billion from option-adjustable rate mortgage loans over the next few years.
Wachovia's board dismissed Thompson in June, and he was replaced the next month by former Treasury undersecretary Bob Steel, who helped engineer the sale to Wells Fargo.
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.
