January 22, 2014 View entire issue of ANO         Close 

Fed Settlements Could Cost Wall Street Firms $50 Billion

Wall Street banks looking to settle with federal authorities over their alleged roles in helping to set off the mortgage crisis could be on the hook for as much as $50 billion, The New York Times reported Jan. 9.

The Times reported that Wall Street is using the Fed’s $13 billion settlement with JPMorgan Chase as a guide for determining how much each bank might have to pay in order to settle with regulators and end the stream of lawsuits related to faulty mortgage investments that recently have plagued the financial sector.

A potential $50 billion settlement between the government and the various Wall Street banks could mean $15 billion in relief for consumers, comprising both cash payments and reductions in loan payment amounts.

An analysis prepared by lawyers showed that Bank of America could end up on the hook for around $11.7 billion in penalties plus another $5 billion in homeowner relief. The Royal Bank of Scotland might wind up paying $10 billion, while Morgan Stanley may be able to settle for $3 billion and Citigroup for around $1 billion. The combined total for other banks would be under $1 billion, the Times reported.

To reach the projected settlement amounts, lawyers considered JPMorgan Chase’s settlement as a percentage of the total amount of residential mortgage securities the firm issued from 2005 to 2008. Of its $13 billion settlement, JPMorgan Chase paid $4 billion to the Federal Housing Finance Agency. Analysts then used that percentage to determine how much the FHFA could get from other banks.

Of course, the 16 banks currently under federal scrutiny will not necessarily agree to the projected settlements, although most have set aside large reserves to help absorb anticipated litigation costs.

The Federal Deposit Insurance Corporation and the National Credit Union Administration also have swung their weight into the legal fray in hopes of recouping losses they shouldered after taking over failed lenders in the wake of a stream of bad mortgages, the Times reported.

The biggest lawsuits are expected to come from the FHFA, which oversees Fannie Mae and Freddie Mac. In 2011, the agency sued 17 banks over selling faulty mortgage securities to the Government-sponsored enterprises. Some of those banks have settled, but 10 remain stuck in litigation.

While settlements would be financially painful for financial institutions, they would offer the advantage of allowing banks to close the books on their liability in the financial crisis.

“Yes, $50 billion is a big number,” Gerard Cassidy, a bank analyst with investment bank RBC Capital Markets, told the Times. “But it is manageable for the 16 banks, and the industry wants to put this behind them.”

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