Editor: David Reiss
Brooklyn Law School

December 3, 2013

Is Banks’ $200 Billion Payout from RMBS Lawsuits Enough?

By David Reiss

S&P issued a brief, The Largest U.S. Banks Should Be Able To Withstand The Ramifications Of Legal Issues, that quantifies the exposure that big banks have from litigation arising from the Subprime Crisis:

Since 2009, the largest U.S. banks (Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo) together have paid or set aside more than $45 billion for mortgage representation and warranty (rep and warranty) issues and have incurred roughly $50 billion in combined legal expenses .  . . This does not include another roughly $30 billion of expenses and mortgage payment relief to consumers to settle mortgage servicing issues. We estimate that the largest banks 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 these reserves. (2)

S&P believes “that the largest banks have, in aggregate, about a $155 billion buffer, which includes a capital cushion, representation and warranty reserves, and our estimate of legal reserves, to absorb losses from a range of additional mortgage-related and other legal exposures.” (2) As far as their ratings go, S&P has already incorporated “heightened legal issues into our ratings, and we currently don’t expect legal settlements to result in negative rating actions for U.S. banks.” (2) But it warns, “an immediate and unexpected significant legal expense could result in the weakening of a bank’s business model through the loss of key clients and employees, as well as the weakening of its capital position.” (2) S&P also acknowledges that there are some not yet quantifiable risks out there, such as DoJ’s FIRREA suits.

As the endgame of the financial crisis begins to take shape and financial institutions are held accountable for their actions, one is left wondering about a group who is left relatively unscathed: financial institution employees who received mega bonuses for involving these banks in these bad deals. As we think about the inevitable next crisis, we should ask if there is a way to hold those individuals accountable too.

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