“It is difficult to get a man to understand something, when his salary depends on his not understanding it.”
But, after a couple of years of exuberant ignorance, home builders have finally started to face reality – or admit reality – slashing their optimism about the US housing market dramatically…
Against expectations of a 67 print, NAHB’s optimism index crash from 68 to 60 in November – its biggest drop since 2014 (to its lowest since Aug 2016) as the highest borrowing costs in eight years restrain demand, adding to signs of a cooling housing market.
Of course the ‘hard’ housing data has been collapsing for months…
The home builder index represents one of the first breaks in high levels of business and consumer confidence that have persisted since Trump was elected.
“Rising mortgage interest rates in recent months coupled with the cumulative run-up in pricing has caused housing demand to stall,” NAHB Chief Economist Robert Dietz said in a statement accompanying the data.
“Given that housing leads the economy, policy makers need to focus more on residential market conditions.”
Under the covers, the NAHB sub-index measuring current sales fell seven points to 67, the lowest since August 2016, while the index for the six-month outlook for transactions dropped 10 points to 65, the lowest since May 2016. A measure of prospective buyer traffic declined eight points to 45, also the lowest since August 2016.
Optimism fell across all regions with The West and Northeast falling the most.
Total household debt hit a new record high, rising by $219 billion (1.6%) to $13.512 trillion in Q3 of 2018, according to the NY Fed’slatest household debt report, the biggest jump since 2016. It was also the 17th consecutive quarter with an increase in household debt, and the total is now $837 billion higher than the previous peak of $12.68 trillion, from the third quarter of 2008. Overall household debt is now 21.2% above the post-financial-crisis trough reached during the second quarter of 2013.
Mortgage balances—the largest component of household debt—rose by $141 billion during the third quarter, to $9.14 trillion. Credit card debt rose by $15 billion to $844 billion; auto loan debt increased by $27 billion in the quarter to $1.265 trillion and student loan debt hit a record high of $1.442 trillion, an increase of $37 billion in Q3.
Balances on home equity lines of credit (HELOC) continued their downward trend, declining by $4 billion, to $432 billion. The median credit score of newly originating mortgage borrowers was roughly unchanged, at 760.
Mortgage originations edged up to $445 billion in the second quarter, from $437 billion in the second quarter. Meanwhile, mortgage delinquencies were unchanged improve, with 1.1% of mortgage balances 90 or more days delinquent in the third quarter, same as the second quarter.
Most newly originated mortgages continued went to borrowers with the highest credit scores, with 58% of new mortgages borrowed by consumers with a 760 credit score or higher.
The median credit score of newly originating borrowers was mostly unchanged; the median credit score among newly originating mortgage borrowers was 758, suggesting that with half of all mortgages going to individuals with high credit scores, mortgages remain tight by historical standards. For auto loan originators, the distribution was flat, and individuals with subprime scores received a substantial share of newly originated auto loans.
In what will come as a surprise to nobody, outstanding student loans rose $37BN to a new all time high of $1.44 trillion as of Sept 30. It should also come as no surprise – or maybe it will to the Fed – that student loan delinquencies remain stubbornly above 10%, a level they hit 6 years ago and have failed to move in either direction since…
… while flows of student debt into serious delinquency – of 90 or more days – spiked in Q3, rising to 9.1% in the third quarter from 8.6% in the previous quarter, according to data from the Federal Reserve Bank of New York.
The third quarter marked an unexpected reversal after a period of improvement for student debt, which totaled $1.4 trillion. Such delinquency flows have been rising on auto debt since 2012 and on credit card debt since last year, which has raised a red flag for economists.
Auto loan balances also hit an all time high, as they continued their six-year upward trend, increasing by $9 billion in the quarter, to $1.24 trillion. Meanwhile, credit card balances rose by $14 billion, or 1.7%, after a seasonal decline in the first quarter, to $829 billion.
Despite rising interest rates, credit card delinquency rates eased slightly, with 7.9% of balances 90 or more days delinquent as of June 30, versus 8.0% at March 31. The share of consumers with an account in collections fell 23.4% between the third quarter of 2017 and the second quarter of 2018, from 12.3% to 9.4%, due to changes in reporting requirements of collections agencies.
Auto loan balances also hit an all time high, as they continued their six-year upward trend, increasing by $27 billion in the quarter, to $1.265 trillion. Meanwhile, credit card balances rose by $15 billion to $844 billion. In line with rising interest rates, credit card delinquency rates rose modestly, with 4.9% of balances 90 or more days delinquent as of Sept 30, versus 4.8% in Q2.
Overall, as of September 30, 4.7% of outstanding debt was in some stage of delinquency, an uptick from 4.5% in the second quarter and the largest in 7 years. Of the $638 billion of debt that is delinquent, $415 billion is seriously delinquent (at least 90 days late or “severely derogatory”). This increase was primarily due to the abovementioned increase in the flow into delinquency for student loan balances during the third quarter of 2018. The flow into 90+ day delinquency for credit card balances has been rising for the last year and remained elevated since then compared to its recent history, while the flow into 90+ day delinquency for auto loan balances has been slowly trending upward since 2012. About 215,000 consumers had a bankruptcy notation added to their credit reports in 2018Q3, slightly higher than in the same quarter of last year. New bankruptcy notations have been at historically low levels since 2016.
This quarter, for the first time, the Fed also broke down consumer debt by age group, and found that debt balances remain more concentrated among older borrowers. The shift over the past decade is due to at least three major forces. First, demographics have changed with large cohorts of baby boomers entering into retirement. Second, demand for credit has shifted, along with changing preferences and borrowing needs following the Great Recession. Finally, the supply of credit has changed: mortgage lending has been tight, while auto loans and credit cards have been more widely available.
In addition to an overall increase in the share of debt held by older borrowers, there has been a noticeable shift in the composition of debt held by different age groups. Student and auto loan debt represent the majority of debt for borrowers under thirty, while housing-related debt makes up the vast majority of debt owned by borrowers over sixty.
Confirming what many know, namely that Millennial borrowers are screwed, the Ny Fed writes that older borrowers have longer credit histories with more borrowing experience, as well as higher and typically steadier incomes; “thus, they often have higher credit scores and are safer bets for lenders.” Tighter mortgage underwriting during the years following the Great Recession has limited mortgage borrowing by younger and less creditworthy borrowers; meanwhile, student loan balances – and as most know “student” loans are usually used for anything but tuition – and participation rose dramatically and credit standards loosened for auto loans and credit cards. Consequently, there has been a relative shift toward non-housing balances among younger borrowers, while housing balances moved to the older and more creditworthy borrowers with lower delinquency rates and better performance overall.
And since this is a circular Catch 22, absent an overhaul of how credit is apportioned by age group, Millennials and other young borrowers will keep getting squeezed out of the credit market resulting in a decline in loan demand – and supply – which is slow at first and then very fast.
“At 5% mortgage rates and with today’s level of affordability, history shows that there is nothing in the way from having a home building boom over the next ten years to satisfy this demographic demand.”
I found the claim contrary to everything I think I know, so I thought I’d lay out the counter argument.
The chart below shows annual growth of the 15+yr/old US population (blue columns) vs. the annual growth of the 15 to 64yr/old population (red balls). The 15+yr/old annual population growth has fallen 25% (decline of a half million annually) since the 1998 peak but more significantly, the 15 to 64yr/old annual population growth has fallen over 80% (decline of 1.8 million/yr) due to a combination of lower immigration rates and lower birth rates.
These population growth trends will only continue to slow through 2030, according to UN and Census estimates (not really estimates, since this population is already born and simply advancing into adulthood). The future estimates for 15 to 64yr/old population growth (presented above) include estimated immigration well above present rates. Most, if not all (net) of the assumed 15 to 64yr/old minimal population growth is premised on ongoing immigration that continues slowing. Thus the forward looking 15 to 64yr/old growth estimates are likely to be lower and perhaps even turning to outright annual declines.
The chart below shows average income, spending, and LFP (labor force participation) rates by age segment. No shocker, those actively working make and spend more than those with low rates of employment. Those who have worked longer earn more than those new to the labor force. Elderly expenditures come into very close alignment with their (generally) fixed incomes.
Noteworthy is that 75+yr/olds have only an 8% LFP rate but will make up over half of the total 65+yr/old population growth through 2030. The next largest growth segment is among 70 to 74yr/olds with a 19% LFP rate, and the smallest increase is among the 65 to 69yr/olds with a 32% LFP. As an aside, 65+ year olds have the highest home ownership rates at 78% vs. 36% for those aged 15 to 34. So while the more affluent portion (5% to 20%?) of 65+yr/olds may be interested in a second home in the desert, the mountains, or beach…the majority already own and are eventually looking to downsize. Simply stated, nearly all the coming growth is among those that work the least, earn the least, spend the least, already own homes, and are more likely to downsize than buy a second home.
Putting it all together (chart below), annual 15+yr/old total population growth (blue columns), 15 to 64yr/old population growth (red line), housing starts (yellow line), and federal funds rate (black line). Given it is the 15 to 64yr/old population that does the net home buying, (and growth among them continues decelerating…coupled with rising rates and elevated valuations versus most population growth among 75+yr/olds who are more likely to sell via downsizing and/or willing properties to their heirs)I contend the US is creating too many homes presently, not too few. Of course, this doesn’t even factor in things like the lack of income growth among the vast majority those working, high student debt loads, slowing household formation, continued delayed family formation and the lowest birth rates in US history which were just recorded in the first quarter of 2018 (according to CDC…HERE), etc. etc.
Contrary to theauthor of the articlethat inspired me, I contend that housing is in for another very rough decade (at the very least)… likely worse than the period during the GFC. The math is pretty straightforward on this one.
A new analysis by UBS concludes that housing prices in Australia could fall as much as 30% in a deep recession scenario. UBS analyst Jonathan Mott assembled five different scenarios to predict the direction that Australia’s housing market could go. The worst case includes the first recession in 27 years, a 30% collapse in house prices and widespread litigation against the banks for mortgage mis-selling. The bear case would also include the central bank cutting rates to zero before embarking on its own version of quantitative easing, the suspension of dividends and equity raisings from the big banks.
Mott thinks that current conditions are already reflecting the very real possibility of a housing correction andalso warnsthat risk of a credit crunch “is real and rising.”
Mott stated: “The rapidly deteriorating housing market is a signal of even tougher times ahead. The housing credit squeeze experienced over the last six months is expanding. The outlook for the banks has not been as challenged since at least 2008.”
UBS dire forecast comes at a time when tighter lending standards have restricted the availability to borrow in Australia, causing the country to enter its second year of a housing slide. Major cities like Sydney and Melbourne are leading the declines, down 7.4% and 4.7% in October from the previous year, respectively. These were the two hottest markets when prices were on their way up in years prior. Meanwhile, the Australia House Price Index has posted its first sequential decline only for the first time since 2011.
Meanwhile, the Reserve Bank of Australia has kept its rate cash rate unchanged and at a relatively low 1.5% since the middle of 2016. The crunch is coming mainly from regulators cracking down on riskier loans, such as interest-only mortgages, that are more popular with speculators than traditional buyers. On top of that, Australian Regulators have enforced more stringent verification on expenses that is tightening the amount of money people are able to borrow as Australians already have some of the highest household debt in the world, something wepointed this in August.
As a reminder, the Australian household debt to income ratio hasballoonedto shocking levels over the past three decades as Sydney is ranked as one of the most overvalued cities in the world. According to the Daily Mail Australia, credit card bills, home mortgages, and personal loans now account for 189 percent of an average Australian household income, compared with just 60 percent in 1988:
An additional reason Australia’s housing prices boomed was the influx of overseas capital. We recentlydiscussedthe urgency with which the Chinese middle class was trying to get capital out of the country. And one of the main ways to do this involved investing in homes in places like Australia (and Canada). Those looking to buy real estate outside of the country have negatively impacted many local economies, sometimes causing housing markets to bubble.
In response, Australia has tightened its foreign investment rules. In 2016, the land Down Under even made it illegal for the country’s four major banks to lend to foreign property buyers without domestic incomes. New Zealand went so far as to simply prohibit foreigners from buying property altogether because the demand was driving property prices out of the reach of locals. Canada did something similar, canceling its Canadian Federal Immigrant Investor program because of the huge backlog and bubbly real estate markets in places like Vancouver and Toronto.
For years, traditional malls around the United States have been in a state of partial or full collapse thanks to “the Amazon effect”: deteriorating conditions, bankrupt or cash-bleeding tenants, with some eventransforming into homeless sheltersas the retail industry “evolves”.
In other words, asBloombergwrites, “things are getting worse for malls across America.” So much worse, in fact, that their owners are simply walking away early from struggling properties, a trend that has sparked fears of material losses among mortgage bond investors.
Investors in and lenders to malls across America are bracing for the fallout from the disappearance of the brick and mortar sub-sector of the industry. With the recent bankruptcy of retail giant Sears, mall operators are continuing to see accelerating defaults in the wake of numerous other retail bankruptcies from stores like Bon-Ton, Wet Seal and RadioShack, and many others, resulting in abrupt declines in rental and lease payments.
And amid the ongoing collapse in what was once a staple source of shopping and entertainment for “middle America”, many mall owners are simply turning over the keys to lenders even before their lease is over, according toBloomberg. That puts the loan servicing companies in a position to either try to run the properties themselves or turn around and sell them. If they can’t make the debt payments, the new owners of the commercial mortgage backed securities in turn end up facing the consequences themselves.
While much of the noise surrounding the “big mall short” which dominated the 2017 airwaves has faded, the number of mall loans issued since the financial crisis that identified as “highest risk” has almost tripled to 29 this year. And the consequences are becoming painfully visible. The Washington Prime Group REIT last month simply gave up on two malls in Kansas where the loans had either defaulted or were close to default. This month, Pennsylvania REIT announced that it left a mall in Wilkes-Barre that also had a loan ready for default. The PA REIT is considering abandoning another mall in Wisconsin for the same reason.
Ben Easterlin, head of commercial lending at Atlanta-based Angel Oak Companies, told Bloomberg that many small town malls are no longer being included in CMBS packages. “It’s easier to value a mall in L.A. than it is in Sheboygan,” he said. “We talk about these malls all day long. We have not seen any of these malls in a CMBS lately and don’t expect to, frankly.
Meanwhile, even though the delinquency rate right in the commercial mortgage backed securities market is at post-crisis lows now, the pain will likely take a couple of years to show up due to maturities that won’t occur for several years.
Adding to the pain, stores leaving these malls often cause a waterfall effect because of co-tenancy clauses that are included in many small mall leases. These clauses mean that if there aren’t enough tenants in a mall at a given time, other tenants have the option to leave. So when a “major” anchor-store company – like Sears – closes a bunch of stores, it can triggers clauses releasing other stores from their contractual leases, further hitting the mall and its creditors.
Still, not all investors see this as Armageddon.
The Galleria at Pittsburgh Mills was seen as an investment opportunity by New York-based Namdar Realty Group and Mason Asset Management, who bought the property for $11.35 million earlier this year after it was once valued at $190 million in 2006, before it was packaged into a commercial mortgage backed securities pool.
Steve Plenge, managing principal of Pacific Retail, is another optimist who sees today’s climate as opportunistic. His firm has taken over at least two malls that have been returned to lenders after defaults. He told Bloomberg: “we think this sector, the servicing business, will get bigger for us. There will be more defaults, more foreclosures.”
We agree. In fact, at the beginning of October wenoted that mall vacancieshad hit 7 year highs. And, according to a WSJreport, the average rent for malls in the third-quarter fell 0.3% to $43.25 a square foot. This is down from $43.36 in the second quarter and is the first time this number has fallen sequentially since 2011, according to research firm Reis, Inc.
At the same time, vacancy rates are on the ascent, rising to 9.1% in the third quarter from 8.6% in the second quarter, and the highest they’ve been since the third quarter of 2011, when these rates hit 9.4%.
Barbara Denham, senior economist with Reis, told the Journal: “The retail sector is still correcting”. And, as long as ever more people continue to migrate to online retailers (or buying less stuff in general), it will be for years.
Last decade, there was a residential mortgage credit bubble that burst. While there doesn’t appear to be a residential mortgage credit bubble (well, just a little), there is most definitely a corporate debt credit bubble that appears to be bursting.
Take General Electric. Their stock price has slipped to under $10 per share from over $30 per share back in early 2017 while the 5% perpetual bond has rapidly gone from around par ($100) to $79 in the wink of The Fed’s eye.
Of course, GE’s earnings-per-share have been tanking as interest rates have been rising.
And to make matters worse, US investment grade debt is on track for worst year since 2008.
Like Robot Monster,the Federal Reserve has helped to create bubbles in the corporate bond market.
“The Collapse Has Begun” – GE Is Now Trading Like Junk
Two weeks after we reported that GE had found itselflocked out of the commercial paper marketfollowing downgrades that made it ineligible for most money market investors, the pain has continued, and yesterday General Electric lost just over $5bn in market capitalization. While far less than the $49bn wiped out from AAPL the same day, it was arguably the bigger headline grabber.
The shares slumped -6.88% after dropping as much as -10% at the lows after the company’s CEO, in an interview with CNBC yesterday, failed to reassure market fears about a weakening financial position. The CEO suggested that the company will now urgently sell assets to address leverage and its precarious liquidity situation whereby it will have to rely on revolvers – and the generosity of its banks – now that it islocked out of the commercial paper market.
Indeed, shares hit levels first seen in 1995 yesterday and have only been lower since, very briefly, during the financial crisis when they hit $6.66 in March 2009. For a bit of perspective, Deutsche Bank notes that the market cap of GE now is $69.5bn and it’s the 80th largest company in the S&P 500. Yet in August 2003, GE was the largest company in the index (and regularly the world between 1993-2005) at a market cap of $296bn, $12bn more than Microsoft in second place. Since then, the tech giant has grown to be a $826bn company well over 10 times the size, while GE’s market cap peaked (ironically) during the dot com bubble in August 2000 at $594BN before tumbling first in the tech crash and then the GFC.
But while most investors have been focusing on GE’s sliding equity, the bigger concern is what happens to the company’s giant debt load, especially if it is downgraded to junk.
First, some background: GE had about $115 billion of debt outstanding as of the end of September, down from $136 billion a year earlier. And while GE is targeting a net EBITDA leverage ratio of 2.5x, this hasn’t been enough to appease credit raters, which have expressed concern recently that GE’s beleaguered power business and deteriorating cash flows will continue to weaken the company’s financial position. As a result, Moody’s downgraded GE two levels last month to Baa1, three steps above speculative grade. S&P Global Ratings and Fitch Ratings assign the company an equivalent BBB+, all with stable outlooks.
The problem is that while the rating agencies still hold GE as an investment grade company, the market disagrees.
GE – a top 15 issuer in both the US and EU indices – was recently downgraded into the BBB bucket, and as recently as September it was trading 20bps inside BBB- bonds. However they crossed over at the end of that month and now trade up to 50bps wide to the average of the weakest notch of IG.
In other words, GE is already trading like junk, and has become the proverbial canary in the coalmine for what many have said could be the biggest risk facing the bond market: over $1 trillion in potential “fallen angel” debt, or investment grade names that end up being downgraded to high yield, resulting in a junk bond crisis.
As Deutsche Bank’s Jim Reid notes, GE’s recent collapse has come at time when much discussion in recent months has been about BBBs as a percentage of the size of the HY market. Since 2005, BBBs have been steadily rising as a percentage of HY climbing back above the previous peak in 2014 (175%) before extending that growth to a current level of 274%. Meanwhile, the total notional of BBB investment grade debt has grown to $2.5 trillion in par value today, a 227% increase since 2009, and now represents 50% of the entire IG index.
Next, to get a sense of just how large the risk of fallen angels in the US is, consider that the BBB part of the IG index is now ~2.5x as large as the entire HY index.
So large BBB companies – and none are larger than GE – with a deteriorating credit story are prone to additional widening pressure as investors fear the risks of an eventual downgrade to HY and a swamping of paper into that market. This, as Deutsche Bank writes, isn’t helping GE at the moment and may be a dress rehearsal for what happens for weaker and large BBB issuers in the next recession.
Meanwhile, while GE is not trading as a pure play junk bond just yet, it is well on its way as the following chart of GE’s spread in the context of both IG and HY shows.
Which is both sad, and ironic: as Bloomberg’s Sebastian Boyd writes this morning, “the company’s CEOs boasted of its AAA rating as a key strategic asset, but it was more than that. The rating, which it maintained for more than half a century, was symbolic of the company’s status as a champion of American commerce. Now, Microsoft and Johnson & Johnson are the only U.S. corporates with the top rating from S&P.”
And while rating agencies have yet to indicate they are contemplating further cuts to the company’s investment grade rating, the bond market has clearly awoken, and nowhere more so than in the swap space, where GE’s Credit Default Swaps have exploded in recent weeks.
What kind of an impact would GE’s downgrade have? With $48 billion of bonds in the Bloomberg Barclays US Corporate index, GE would become almost 9% of the BB universe. And one look at Boyd’s chart below shows that the market is increasingly pricing GE’s index-eligible bonds as junk, especially in the context of the move over the past month.
An additional risk to the company’s credit profile: GE has more debt coming due in the next 18 months than any other BBB rated borrower: that fact alone makes it the most exposed to higher rates according to Boyd.
Meanwhile, GE’s ongoing spread blow out, and junk-equivalent price, has not escaped unnoticed, and as we have been warning for a while, could portend a broader repricing in the credit sector. As Guggenheim CIO commented this morning, “the selloff in GE is not an isolated event. More investment grade credits to follow. The slide and collapse in investment grade debt has begun.”
The selloff in GE is not an isolated event. More investment grade credits to follow. The slide and collapse in investment grade debt has begun.
Then again, Minerd’s concern pales in comparison to what some other credit strategists. In an interview with Bloomberg TV on November 8, Bruce Richards, chairman and chief executive officer of the multi-billion Marathon Asset Management warned that over leveraged companies “are going to get crushed” in the next recession. Richards also warned that when the cycle does turn, “with no liquidity in the high-yield market to speak of, when these tens of billions or potentially hundreds of billions falls into junk land, it’s “Watch out below!” because there’s going to be enormous price adjustments.”
Echoing what we said above, Richards noted that about $1 trillion of bonds are rated as BBB, as investment- grade, when they has leverage ratios worthy of junk, adding that “the magnifying glass is now shifting” toward ratings companies.
For now the “magnifying glass” appears to have focused on GE, and judging by the blow out in spreads for this “investment grade” credit, what it has found has been unexpected. Which brings us to the question we asked at the top: will GE be the canary in the credit crisis coalmine and, when the next crisis finally does strike, the biggest fallen angel of them all?
“Without that central bank support and transitioning off the fiscal stimulus, our long-term outlook for investment grade is definitely on the more bearish side over the last two to three years.”
Wells Fargo is adopting an unusual defense against a shareholder lawsuit: claiming, essentially, that shareholders can’t hold the bank accountable for CEO Tim Sloan’s statements that it was “working to restore trust” and be “more transparent” about its scandals – because it should have been obvious that Sloan was lying.
The defense, which Wells Fargo put forth in a legal filing aimed at getting a shareholder lawsuit dismissed, relies on the legal concept of “puffery,” according to a Los Angeles Times report.
Generally, businesses engage in “puffery” when they make advertising claims that are vague or transparently untrue – a restaurant claiming it has “the world’s best burgers,” for instance. Judges and regulators have ruled that claims like that are so obviously inflated that consumers won’t take them seriously. Such claims aren’t actionable in court, the Times reported.
The thing is, “puffery” usually applies to out sized advertising claims. Wells Fargo is now claiming that the “puffery” defense should be applied to statements CEO Tim Sloan made to investors, and that a lawsuit filed by shareholders should be dismissed on those grounds.
The lawsuit stems from one of the bank’s many scandals – in particular the July 2017 revelation that Wells Fargo had for years been charging auto loan customers for unnecessary insurance. The lawsuit is seeking class certification for all investors who bought the company’s stock after Nov. 3, 2016, through Aug. 3, 2018, the Times reported.
It was on Nov. 3, 2016, that Sloan announced at an investor’s conference that he was “not aware” of any undisclosed scandals. In fact, Wells Fargo already knew that its improper auto insurance charges had pushed as many as 275,000 customers into delinquency and resulted in 25,000 improper repossessions. In fact, top bank executives allegedly knew of the problem as early as 2012, but took no action until 2016, according to the Times. Regulators have already slammed the bank for its inaction; earlier this year, the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency fined Wells Fargo $1 billion for the auto-insurance scandal and a rash of improper mortgage fees.
The shareholder lawsuit focuses on efforts by Sloan and other Wells Fargo executives to conceal the auto-loan scandal, the Times reported. Wells Fargo execs were, at the time, already dealing with the bank’s massive fake-accounts scandal. They insisted that Wells Fargo would be “more transparent” about its scandals even while failing to disclose the auto-insurance issue.
During an investor call in January 2017, Sloan said that the bank wanted “to leave no stone un-turned. If we find something that’s important, we’ll communicate that.”
By that time, Sloan had already received an independent report on the auto-insurance scandal, the Times reported. The scandal did not become public, however, until the independent report was leaked to the media in July 2017.
The shareholder lawsuit contends that Wells Fargo lied about its intent to be transparency. Wells Fargo, however, maintains that Sloan’s statements were “puffery.” According to the bank’s legal filing, Sloan’s comments were generic statements “on which no reasonable investor could rely.”
“This is just another example of corporate actors making statements to the market, and then trying to avoid liability for the representations they made,” Darren Robbins, the attorney bringing the shareholder suit, told the Times.
