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 industry’s potential legal exposure.
Bracing for a potential reckoning, the banks and their outside lawyers are quietly using JPMorgan Chase’s 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 nation’s 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 Stanley’s combined tally, the analysis shows, could be around $3 billion, with roughly a third going to consumer relief, while Goldman Sachs’s total could come to roughly $3.4 billion. For the Royal Bank of Scotland, the total