S&P: U.S. Banks Could Face Over $100 Billion in Legal Charges

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US-ECO-BANKING-MORTGAGE SECURITIES-JPMORGAN
Robyn Beck, AFP/Getty Images
By Matt Clinch

The fallout from the subprime mortgage crisis continues to plague U.S. banks, according to Standard & Poor's, with the ratings agency estimating billions of dollars in extra litigation fees may hit major lenders.

In the lead-up to the financial crash of 2008, U.S. banks packaged and sold residential mortgage-backed securities -- a type of financial instrument that contained mortgages and home-equity loans of varying risk.

Once homeowners in the U.S. started defaulting on their loans in record numbers in 2007, the market for mortgage backed securities collapsed as it became impossible to tell whether the debt in the security was high- or low-risk, sparking the global financial crisis.

This month, JPMorgan agreed to pay $13 billion to settle charges that it misrepresented the quality of mortgages it sold in these securities. Meanwhile, the legal wrangling over Bank of America's proposed settlement of $8.5 billion is yet to be completed. S&P now believes that more banks could be set to face extra payouts.

"We estimate that the largest banks may need to pay out an additional $55 billion to $105 billion to settle mortgage-related issues,"
Stuart Plesser, a credit analyst at the ratings agency said in a press release late Tuesday.

The banks included in the report are Bank of America (BAC), Citigroup (C), Goldman Sachs (GS), JPMorgan Chase (JPM), Morgan Stanley (MS) and Wells Fargo (WFC). These banks weren't immediately available for comment when contacted by CNBC. Citigroup declined to comment when contacted.

Investors claim that the securities sold have breached "representations and warranties" that had been in place to ensure certain standards and conditions for the financial instruments.

Plesser added that the banks should be able to able to withstand the ramifications of legal issues having paid or set aside more than $45 billion and incurring roughly $50 billion in combined legal expenses.

"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 said, but iterated that it still has a negative rating on Bank of America.


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k4jlp

Correction: Lawyers are happy

November 27 2013 at 7:46 AM Report abuse rate up rate down Reply
k4jlp

Not a problem, just a "cost of doing the biz", a nice tax writeoff and the Laywers are happy....

November 27 2013 at 7:44 AM Report abuse rate up rate down Reply