Banks could still see legal costs of $100bn

by Ryan Smith02 Dec 2013
Big banks will continue to see fallout – and make payouts – in the wake of the subprime mortgage crisis, according to an analysis by Standard & Poor’s.

Lenders like Bank of America and JPMorgan Chase have already paid billions in penalties over their mortgage sales practices. But in a report released last week, S&P said legal fallout from the financial meltdown could still cost big banks upward of $100bn.

“We estimate that the U.S. banking industry may need to pay out an additional $55 billion to $105 billion to settle mortgage-related issues, some of which is already accounted for in reserves,” S&P credit analyst Stuart Plesser wrote in a release on Tuesday.

And with JPMorgan’s recent, historic $13bn fraud settlement with the U.S. government, the feds can be counted on to continue pursuing litigation against big banks, Plesser predicted.

“Notably, mortgage-related litigation has recently gotten a second wind and has expanded beyond investor claims,” he wrote. “The U.S. Department of Justice has been invoking the civil money penalty provision of the Financial Reform, Recovery and Enforcement Act of 1989 to bring cases against financial institutions for misconduct during the time leading up to the financial crisis covering a variety of issues, including securities fraud and poor lending practices.”

But the bank’s legal nightmares won’t necessarily affect their S&P ratings, Plesser noted.

“We already incorporate heightened legal issues into our ratings, and we currently don't expect legal settlements to result in negative rating actions for U.S. banks,” he wrote.

S&P itself is currently being sued by several states and the federal government over allegations that it gave AAA ratings to shoddy mortgage-backed securities in order to build up its business with the banks selling the investments. The ratings agency has categorically denied any wrongdoing, calling all of the lawsuits “meritless.”

“The claims are simply not true and we will vigorously defend S&P against them,” the company said in a statement.