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The six largest U.S. banks, led by JPMorgan Chase & Co. and Bank of America Corp., have accumulate $103 billion in legal costs since the monetary crisis, more than all dividends paid to shareholders in the past five years.
That’s the amount given to lawyers and litigation, as well as for settling claims about shoddy mortgages and foreclosures, according to data compiled by Bloomberg. The sum tops the banks’ combined profit last year.
More Cases
Five years after the financial crisis shook global markets, banks are facing accusations that they misled buyers of mortgage-backed securities, rigged interest rates used to price loans worldwide and manipulated markets for credit derivatives and commodities. U.S. Attorney General Eric Holder told the Wall Street Journal this month that he’ll bring new cases tied to the financial crisis in the months ahead.
Fed Reports
The data were compiled from quarterly reports to the Federal Reserve, the SEC and investors covering the period from January 2008 through June 2013. The reports from Bank of America, JPMorgan, Citigroup Inc., Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley included Y-9C forms that bank holding companies with more than $500 million of assets must file with the Fed. The forms disclose specific costs, such as legal fees, that exceed 3 percent of total non-interest expenses.
JPMorgan’s Calendar
Bank of America, led by Chief Executive Officer Brian T. Moynihan, 53, increased its legal costs by $3.3 billion in the first half to a total of $19.1 billion. JPMorgan added $1.5 billion in the period. The other four lenders added about $2.4 billion combined in the six months.
Moved Markets
Penalties in the London Whale episode, named for a U.K. trader whose big bets moved markets, may reach $600 million, the Wall Street Journal reported yesterday. Regulators also are preparing enforcement actions against JPMorgan for its treatment of consumers during the recession that could result in fines of about $80 million, the New York Times reported, citing people briefed on the matter.
Dividend Hunger
Stockholders have pushed banks to raise payouts that were scrapped or reduced to token amounts during the financial crisis, and punished top managers who didn’t follow through. Bank of America shares plunged 58 percent in 2011 after Moynihan failed to get U.S. approval for an increase, and regulators rejected a request from Citigroup’s Vikram Pandit in 2012, leading to his ouster as CEO.
‘Headline Risk’
JPMorgan’s stock has trailed the broader banking index since the beginning of the year, and Chris Mutascio, an analyst at Stifel Financial Corp.’s KBW unit, wrote in a note last week that the “headline risk” of government investigations and lawsuits has hurt the shares.
Criminal Probe
While some cases date back several years, others are more recent. The U.S. sued Bank of America this month, alleging the Charlotte, North Carolina-based firm misled investors in a deal for mortgage-backed bonds. JPMorgan disclosed a criminal probe involving similar securities this month. The bank declined to comment at the time, while Bank of America said buyers of its bonds were sophisticated investors with ample access to underlying data.
Future Losses
The bank also boosted its estimate for possible future legal losses not covered by reserves to $5 billion as of June from $4 billion a year earlier. JPMorgan raised the upper end of its estimate to $6.8 billion from $5.3 billion. Bank of America reduced its figure to $2.8 billion from $4.1 billion after settling some of its biggest pending cases.
Incorrect Data
The top four banks added $1.4 billion to their reserves in the first half to cover repurchases of bad home loans, filings show. These cases typically involve demands for refunds from investors who bought mortgages or mortgage-backed securities and later uncovered flaws in the paperwork, such as incorrect data about the borrowers and properties. Banks typically sell the mortgages with a promise to buy them back if such defects arise.
Moynihan’s Tenure
While the stock is up 22 percent this year, it’s languishing below the $15.06 at the start of Moynihan’s tenure in January 2010 as he oversaw disputes with Fannie Mae, Freddie Mac, MBIA Inc., Assured Guaranty Ltd., the Fed, U.S. Treasury Department, Office of the Comptroller of the Currency, mortgage bond investors and state attorneys general from across the country. Moynihan, a former general counsel, at one point vowed to wage “hand-to-hand combat” in lawsuits about faulty mortgages before agreeing to settlements.
Investors and analysts have pressed Moynihan on when litigation expenses will subside. In March, he said the firm finished paying the “lion’s share” of costs tied to faulty mortgages.
“We now have 103 billion reasons why not doing the right thing is costly to banks,” said Mark T. Williams, a Boston University lecturer and former Fed examiner specializing in risk management. “The risk of noncompliance has finally been appropriately priced.”
The legal process will continue for years, especially if the U.S. attorney general brings more cases and unearths information that can be used in new lawsuits.
While some cases have a five-year statute of limitations, those involving bank frauds have a deadline that’s twice as long. The Financial Institutions Reform, Recovery and Enforcement Act, known as FIRREA, has a 10-year limit, and the U.S. used the law against JPMorgan and Bank of America.
“It’s likely the financial institutions don’t yet know of some of these lawsuits,” said Walter J. Mix III, head of financial-institutions consulting at Berkeley Research Group LLC and a former commissioner of the California Department of Financial Institutions. “The litigation can go on for 10 years or more.”
