Wall Street may pay $50 bn to settle mortgage suits

Written by New York Times | Updated: Jan 11 2014, 23:21pm hrs
JPMorgan ChaseIf the settlements materialise, they could yield, according to the analysis, $15 billion in relief for consumers.
Wall Street could pay nearly $50 billion to buy peace from federal authorities who are taking aim at the banks over their role in the mortgage crisis, according to interviews and a confidential analysis of the industrys potential legal exposure.

Bracing for a potential reckoning, the banks and their outside lawyers are quietly using JPMorgan Chases record $13 billion mortgage settlement in November to do the math and determine just how much each bank might have to pay to move beyond the torrent of government mortgage litigation that has dogged them since the financial crisis. Such calculations, people briefed on the matter said, have gained particular urgency among the banks board members.

If the settlements materialise, they could yield, according to the analysis, $15 billion in relief for consumers a mixture of cash payments and other assistance, like reductions in the size of homeowners loan payments. A payment of $50 billion, made up of a string of separate deals, would amount to roughly half the total annual profit of large American banks in 2012.

The JPMorgan settlement has stepped up the pressure on other banks to strike their own separate deals in the coming months, some top bank executives say. When the JPMorgan settlement was announced, the Justice Department official who took the lead in brokering the deal, Tony West, said it could offer a model for other financial institutions being investigated in their sales of troubled mortgage investments. The government made JPMorgan a test case, knowing the nations largest bank, facing a wide swath of legal woes, was vulnerable. The $13 billion deal has left some on Wall Street worried that the cost of their own deals will now be inflated, the people said.

The government is facing pressure of its own to make the banks pay for their role in the housing crisis, zeroing in on whether the banks duped investors into buying mortgages in the heady days before the financial downturn.

The analysis, which lawyers prepared for one of the financial institutions and which was reviewed by The New York Times, indicates that Bank of America could ultimately settle for $11.7 billion in penalties, with an additional $5 billion in relief to homeowners.

Morgan Stanleys combined tally, the analysis shows, could be around $3 billion, with roughly a third going to consumer relief, while Goldman Sachss total could come to roughly $3.4 billion. For the Royal Bank of Scotland, the total price could be around $10 billion, which might prompt an outcry in Britain, where the government owns a majority stake in the bank. Citigroup could pay roughly $1 billion, the analysis shows. The potential penalties for other banks are under $1 billion, the analysis shows.

Some of the 16 banks under scrutiny could decide against striking deals altogether, while others could try to negotiate a lower settlement number. The lawsuits and investigations against the banks vary, which could affect their ultimate outcomes. Anticipating the potential pain, banks have also set aside large reserves to absorb the litigation costs.

The projected payments are based on analysis by lawyers sorting through the mortgage morass to get a firmer grasp on what it could cost to resolve years of investigations. The banks declined to comment.

Resolution would be greeted with resigned relief on Wall Street. The banks are facing investigations from government authorities including state attorneys general and federal prosecutors. The legal barrage has been generating mounting frustration among some top executives. The bankers, who spoke on the condition of anonymity, say the government has taken an arbitrary, one-size-fits-all approach that could force them to pay more than their fair share.

At the same time, a popular antibank sentiment makes it even harder for Wall Street to win court battles against federal authorities, the people said. Some critics of Wall Street they point to the foreclosure-dotted neighborhoods, languishing property values in areas hard-hit by the housing crisis and other signs of wreckage lingering across the country argue that even the large payouts from banks fall short. The scarce number of criminal actions filed in the aftermath of the financial crisis, with few top executives in the governments cross hairs, also fueled public frustration.