Wells settles DOJ mortgage charges; Fidelity to offer no-fee index funds

Receiving Wide Coverage ...

Trouble behind: Wells Fargo has agreed to pay more than $2 billion to settle Justice Department charges that it sold toxic mortgage-backed securities before the financial crisis. DOJ said the bank was “responsible for originating and selling tens of thousands of loans that were packaged into securities and subsequently defaulted.” The bank had already set aside money to cover the settlement, which it was negotiating for several months. Wall Street Journal, Financial Times, American Banker

The settlement “appears to mark the end of the parade of headlines about multibillion-dollar settlements with big U.S. banks that had endured since the subprime mortgage meltdown a decade ago,” American Banker says.

Race to the bottom: Fidelity Investments said it will begin offering two stock index funds with no fees, an industry first. It also announced sharp cuts of fees for its other index funds and said it will do away with investment minimums. The moves put “new pressure on low-cost rivals such as Vanguard Group and Charles Schwab,” the Wall Street Journal comments, and are “part of a broader reduction in the price of investing as firms duel for increasingly cost-sensitive clients.”

“This is a key moment for managers to accept that index-based investing is here to stay,” said Todd Rosenbluth of investment research firm CFRA.

“This is absolutely a moment, and one that investors should be celebrating,” said Ben Johnson, an analyst at Morningstar. “But pure-play asset managers that don’t have other revenue streams . . . are probably feeling the pressure as greatly as they ever have on a day like today.” Indeed, the stocks of some of Fidelity’s competitors dropped after the announcement.

Back in the black: Barclays reported a profit of £468 million ($614 million) for the first half, after a £1.2 billion loss a year earlier. Revenue was roughly flat. It was “the first time in years” the bank’s results “weren’t marred by a big financial impairment.” Wall Street Journal, Financial Times

Wall Street Journal

If it quacks like a duck … : Pentagon Federal Credit Union’s James Schenck, a former Black Hawk helicopter pilot, had an audacious goal when he became CEO four years ago: to boost the credit union’s assets to $75 billion from $18 billion by 2025. But that “Drive to 75” is “irking some bankers and pressing up against regulatory boundaries. Critics see strategies like PenFed’s as straying from the credit-union ideal of giving underserved borrowers an alternative to banks.”

“If you want to be like a bank, you should be regulated like a bank and taxed like a bank,” M&T Bank CFO Darren King said.

Start your engines: Lenders are preparing for a Financial Accounting Standards Board rule that will require them to record loan losses faster than they do now. The new rule, the credit expected credit loss standard, or CECL, requires banks to record all losses they expect on loans as soon as the loans are made. “Every finance company in America is going through a CECL exercise,” according to Chris Lown, chief financial officer of student loan servicer Navient. The rule takes effect in 2020 for publicly traded banks and 2021 for privately held lenders.

Financial Times

Growing pains: Square second quarter results beat market forecasts as it cut its net loss to $5.9 million. Revenue jumped 60% versus a year earlier as operating expenses rose 45%. But the payments company’s stock price fell as its earnings guidance for the rest of the year fell short of expectations. Square said “its business was experiencing continued momentum, allowing it to raise its revenue forecasts, but rising expenses are still cutting into earnings.”

Quotable

“As a military officer, you want to set a ‘big, hairy, audacious goal’ past your true target to make sure you can reach your objective. If I let my organization get complacent … we are going to fail.” — Pentagon Federal CEO James Schenck about his ambition to increase the credit union’s assets to $75 billion by 2025.