New Tax-Credit Investigation May Trip Up Wells Fargo
(Bloomberg Opinion) -- As much as Wells Fargo & Co. wants the public to believe it has put its troubled past behind it, yet another legal tangle shows it still doesn’t have a handle on its own questionable behavior.
In the latest turn of events, the Department of Justice has started an investigation into whether Wells Fargo colluded with developers to submit low-ball bids on tax credits that support low-income housing projects, according to people close to the matter who were not authorized to discuss it publicly. The probe started in Miami but has now been referred to the corruption unit of the Department of Justice, which is looking into deals involving Wells Fargo nationwide, one of these people said.
The U.S. Attorney’s office in Miami convened a grand jury recently to look into the accusations against Wells Fargo, according to one of the people close to the investigation. Subpoenas have been issued to Wells Fargo, these people said, as well as to other developers looking for information on the deals they have done with the bank.
Assistant U.S. Attorney Michael Sherwin, who has been investigating fraud in the low-income housing tax-credit program in Florida for the past few years, declined to comment on Wells Fargo specifically but said that his investigation was continuing and that it was looking at the full industry, including syndicators and lenders. “We see potential anomalies in the purchase prices that suggest theft,” said Sherwin, who has brought previous cases against developers.
Michael Cox, a former low-income housing developer in Miami who was prosecuted in an earlier case, said he was aware that Wells Fargo is under investigation and that he is cooperating in the inquiry.
The Department of Justice is looking into other banks as well, according to two people close to the matter. But the case against Wells Fargo is the furthest along and will be the initial focus of the tax-credit probe. Last week, Wells Fargo disclosed in a financial filing that government agencies were looking into its purchase and negotiation of the tax credits but did not elaborate or identify the agencies.
The bank said in a statement, “Wells Fargo is committed to providing financial solutions to support the development and rehabilitation of affordable multifamily housing in areas where there are the biggest needs. Our investment in affordable housing has helped improve access to housing in cities across the country.” The bank declined to comment specifically on the tax-credit probe.
In late June, Wells Fargo took out a two-page advertisement in the New York Times meant to rehabilitate its reputation, trumpeting its financing of billions of dollars in low-income housing. But that signature effort has become just the most recent example of its failure to revamp its troubled culture, which has featured a phony accounts scandal, the improper alteration of documents of business borrowers and the improper collection of fees in its pension fund business. The bank’s wealth management unit is also under investigation for pressuring clients into rolling over their low-cost 401(k) accounts into more expensive alternatives.
The tax-credit program at the heart of the investigation was created during the 1980s to add market discipline into the subsidized housing market. The tax credits are funded federally, but local agencies hand them out to developers, who receive bids for the credits from banks and other investors looking to offset income taxes. The banks are the biggest buyers of the credits because they not only receive a tax write-off but also get credit under the Community Reinvestment Act, which requires banks to invest in poorer neighborhoods where they have customers.
About $9 billion of low-income housing tax credits are issued each year, and among the banks Wells Fargo is the largest purchaser. Last year, Wells Fargo announced that it had invested $9 billion in the program during the previous five years.
According to two people close to the investigation, the Department of Justice is looking into whether Wells Fargo colluded with developers to drive down the price of the credits over the past decade. In return, Wells Fargo would offer the developers better loan terms or agree to fund less desirable deals. Cox, the former developer, said he knew about instances in which Wells Fargo would move tax-credit dollars from one deal to another, which is not allowed. Cox also said that Wells Fargo would make the price of tax credits on one deal contingent on what it would pay for tax credits in other deals. By law, each deal is supposed to be bid individually.
Paying less for the tax credits not only drives up the cost of providing the credit for the U.S. government, but it might also require some deals to be allocated more credits than they would normally need, depriving them from other developments. It also essentially drives up the return a bank can make on the tax-credit investment.
Based on the deals that have been examined so far, according to a person close to the investigation, Wells Fargo’s actions may have defrauded hundreds of millions of dollars from the federal tax program. And according to Cox, a number of the people he worked with on these deals are still working at Wells Fargo.
CEO Tim Sloan, who has been at Wells Fargo for more than two decades, has survived the current slate of scandals by saying that they were the result of bad incentives and a few bad apples and that the bank had cleaned up its culture. As this latest investigation demonstrates, Sloan is going to have a harder and harder time making his line stick. It’s impossible to say your house is in order without actually having it in order.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Stephen Gandel is a Bloomberg Opinion columnist covering banking and equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.
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