The six biggest U.S. banks, led by JPMorgan Chase & Co. and Bank of America Corp., have piled up $103 billion in legal costs since the financial crisis, more than all dividends paid to shareholders in the past five years.
That’s the amount allotted 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.
The mounting bills have vexed bankers who are counting on expense cuts to make up for slow revenue growth and make room for higher payouts. About 40 percent of the legal and litigation outlays arose since January 2012, and banks are warning the tally may surge as regulators, prosecutors and investors press new claims. The prospect is clouding outlooks for stock prices, and by some estimates the damage could last another decade.
“They’ve crossed the point of no return when it comes to the effects that these expenses are going to have on earnings,” said Jeffrey Sica, who helps oversee more than $1 billion as head of Sica Wealth Management LLC in Morristown, New Jersey, and doesn’t recommend bank stocks. “This is going to keep on hurting them, and people will start paying more attention.”
JPMorgan and Bank of America bore about 75 percent of the total costs, according to the figures compiled from company reports. JPMorgan devoted $21.3 billion to legal fees and litigation since the start of 2008, more than any other lender, and added $8.1 billion to reserves for mortgage buybacks, filings show.
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.
Investigators may be stepping up efforts now that the economy has recovered and the solvency of the nation’s banks is no longer in doubt, according to Daniel Hurson, a former U.S. prosecutor and Securities and Exchange Commission lawyer who runs his own Washington practice.
“There may be a sense that financial institutions have gotten away with a lot and maybe now is the time to catch up,” Hurson said.
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.
Some of the banks distinguished between litigation costs and legal fees, which could include routine expenses of running a business, such as drawing up contracts, rather than lawsuits. Still, most outlays at JPMorgan, Bank of America and Citigroup were tied specifically to litigation, the filings show.
Spokesmen for the six banks declined to comment about their legal costs.
Legal fees and litigation costs accounted for $56 billion of Bloomberg’s $103 billion tally, with $7.2 billion incurred just for the first six months of this year. The rest, $47 billion, was for payments to mortgage investors.
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.
Jamie Dimon, 57, JPMorgan’s CEO, is contending with criminal probes into his New York-based bank’s energy-trading and mortgage-backed securities operations while grappling with investigations into anti-money-laundering safeguards, foreclosures, credit-card collections, and the $6.2 billion London Whale trading loss last year.
A U.S. housing regulator is seeking at least $6 billion to settle claims JPMorgan sold bad mortgage bonds to government- backed finance companies Fannie Mae and Freddie Mac, a person briefed on the matter said this week. The bank is fighting the request, the person said.
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.
Spokesmen for JPMorgan declined to comment on any of the cases.
Some of JPMorgan’s legal bills and repurchase costs stem from practices at Bears Stearns Cos. and Washington Mutual Inc., assets of which the bank acquired as those firms headed toward collapse during the financial crisis. Bank of America also has been hobbled by defaults on loans created at the subprime lender it bought in 2008, Countrywide Financial Corp.
Investors mostly have ignored the mounting legal tab, focusing more on the potential for higher dividends as earnings recover. JPMorgan and San Francisco-based Wells Fargo have reported record profits since the crisis, and the 24-company KBW Bank Index has jumped 22 percent this year, outpacing the 14 percent return for the Standard & Poor’s 500 Index. Collectively, the six banks earned $59.5 billion in 2012.
They also paid $98.6 billion for common and preferred stock dividends from the end of 2007 through the first half of this year. Wells Fargo led with $24.2 billion, followed by JPMorgan at $23.9 billion, the data show.
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.
Executives at JPMorgan, whose stock pays 38 cents a quarter, want to boost returns to shareholders, Chief Financial Officer Marianne Lake said this year. John Stumpf, CEO of fourth-biggest lender Wells Fargo, has raised the dividend twice this year and included more stock buybacks in its capital plan.
‘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.
The totals would be billions of dollars higher if U.S. cases involving the biggest European banks were counted. HSBC Holdings Plc, Europe’s largest lender, agreed last year to pay $1.92 billion to settle U.S. money-laundering probes. UBS AG, the largest lender in Switzerland, said in July it would pay $885 million to Fannie Mae and Freddie Mac on claims that it improperly sold them mortgage-backed securities.
Barclays Plc, UBS and Royal Bank of Scotland Group Plc were fined a combined $2.5 billion to settle allegations by regulators in the U.S. and elsewhere that that they helped rig the benchmark London interbank offered rate.
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.
The investigations indicate a “re-energized crusade” from the Justice Department, according to Charles Peabody, an analyst with Portales Partners LLC in New York who recommends investors sell JPMorgan, Bank of America and Citigroup shares. This will contribute to a “material cyclical rise” in the banks’ litigation costs, he told clients last week.
Citigroup, the third-biggest U.S. bank, added $1.4 billion in legal expenses so far this year, almost double its costs for the first half of 2012. The New York-based lender is facing “legacy issues” tied to mortgage products, Chief Financial Officer John Gerspach said last month.
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.
“There is wide political support for punitive action against these banks, and it’s not going away,” said Keith Davis, an analyst at Farr, Miller & Washington LLC, which manages about $930 million, including shares of JPMorgan and Goldman Sachs. “This will last longer than people think.”
The legal bills are hindering Wall Street bosses in their campaigns to cut expenses. Citigroup’s total outlays for the first half rose 1 percent to $24.4 billion, even as CEO Michael Corbat, 53, fired thousands of workers and sold businesses to make his bank more efficient.
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.
Bank of America has set aside $28.6 billion for repurchases since 2008, more than half of the total for the four lenders, according to filings. When added to legal costs, the firm’s combined tally is about $48 billion.
Those reserves probably aren’t enough to cover more recent cases, according to Peabody, the Portales analyst. Bank of America is facing a multibillion-dollar settlement with the Federal Housing Finance Agency tied to mortgage-backed securities, he wrote in an Aug. 6 note that recommended “aggressively” selling Bank of America shares.
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.”
With assistance from Keri Geiger, Hugh Son and Peter Eichenbaum in New York and Dawn Kopecki in Washington. Editors: Rick Green, Robert Friedman