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Criminals….errr….Banks' Legal Bills Soar in 2010, Menacing Profits
January 9th, 2011 | 
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Awww….how sad. Poor widdle bankers might not get to give themselves huge bonuses from our taxpayer money – instead the have to pay a stable of high-powered lawyers to fight the massive number of fraud charges they are facing.
From the Miami Herald:
JPMorgan Chase and the biggest U.S. banks face billions of dollars in legal costs related to their role in the financial crisis, threatening their profits and the stock price gains they made in 2010, analysts said.
JPMorgan, the second biggest bank by assets, reported $5.2 billion of legal costs in the first nine months of last year. The costs would rise if the bank reserves for multibillion-dollar lawsuits by Lehman Brothers Holdings and the trustee liquidating Bernard L. Madoff’s firm.
Bank of America and Citigroup are also besieged by lawsuits stemming from the credit crisis, brought by plaintiffs ranging from foreclosed-upon homeowners to institutional investors whose mortgage-backed bonds turned out to be money-losers.
ARRAY OF SUITS
Stephen Cutler, JPMorgan’s in-house lawyer and a former SEC enforcement chief, declined to comment through bank spokesman Joseph Evangelisti.
Bankrupt Lehman is claiming $8.6 billion in collateral from JPMorgan plus tens of billions of dollars in damages, while Madoff trustee Irving Picard is demanding $6.4 billion on the grounds that JPMorgan aided and abetted the biggest Ponzi scheme in history.
Almost nine pages of JPMorgan’s third-quarter 10-Q deal with legal issues. They range from home foreclosure investigations by state officials, to shareholder lawsuits against Bear Stearns Cos., which JPMorgan bought in 2008, to suits from nine different Federal Home Loan Banks demanding compensation for mortgage-backed securities bought from JPMorgan, Bear Stearns or Washington Mutual Bank, also purchased in 2008.
Bank of America reported $1.2 billion in litigation costs for the nine months through Sept. 30, excluding fees to outside law firms. It is suing or being sued in 5,696 legal proceedings in federal court, compared with JPMorgan’s 3,757 lawsuits, according to data compiled by Bloomberg.
LITIGATION EXPENSES
Cases for which Bank of America has already reserved some money may wind up costing the bank $400 million to $1.9 billion more than it has set aside, according to its 10-Q. The bank’s nine-month litigation cost of $1.2 billion compared with $477 million a year earlier.
“Our litigation-related expenses are cyclical and are not attributable to a single factor,” said Bank of America spokesman Lawrence Grayson.
Citigroup, now dealing with 1,713 federal court proceedings according to Bloomberg data, tries to settle lawsuits, the bank said in a filing. Shannon Bell, a spokeswoman for Citigroup, declined to comment.
Wells Fargo, the fourth biggest bank, is involved in 2,758 lawsuits, according to Bloomberg data. Mary Eshet, a Wells Fargo spokeswoman, declined to comment.
Dimon articulated the bank’s approach to lawsuits in the October analyst call.
“When we’re wrong, we’re going to settle, and when we’re right, we’re going to fight,” he said.
JPMorgan was the last major underwriter of WorldCom securities to settle suits started in 2002 after an $11 billion fraud sank the long-distance telephone company and sent Chairman Bernard Ebbers to prison.
Banks have leeway under current accounting rules to report litigation costs, or not. Citibank and Wells Fargo don’t give a dollar amount for legal costs; JPMorgan and Bank of America do.
Among other things, the FASB proposal would force banks to report the basis for the legal claim, the amount being claimed and how the company will defend itself. Banks will have to regularly update their estimated loss, and when it might occur; and in cases where they are “reasonably” likely to lose, they have to estimate their possible range of loss and say how much they’ve put aside to pay for it.
JPMorgan currently is fighting Lehman’s lawsuit, which alleges the bank and Dimon helped cause its failure by siphoning off badly needed funds.
JPMorgan twice asked a judge to dismiss the suit, saying it took the $8.6 billion in collateral from Lehman under a contract to clear trades for Lehman’s brokerage. So-called safe harbor laws protect a clearing bank from being sued if a brokerage client fails, the bank said in court papers.
U.S. Bankruptcy Judge James Peck in Manhattan, who hasn’t yet ruled on JPMorgan’s request for dismissal, has at least three times rejected the safe harbor defense in other cases. Bank of America was ordered to return $500 million of deposits to Lehman, and pay $90 million in interest.
Read more here.
Posted in Banks, Corruption, Economic Crisis, Economy, FHLB, Financial System, Foreclosuregate, Foreclosures, Fraud, Lawsuit, Lawyers, Legal, Litigation, Money, Mortgage Fraud | 
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More FHLB Fraudulent Misrepresentation Suits
Today the Federal Home Loan Bank of Chicago will file complaints against several defendants regarding some of the private-label mortgage-backed securities (MBS) they sold us between 2005 and 2007. We contend that the quality of the loans that comprise the pools of securities cited in today’s complaints was inconsistent with the description in the pre-purchase documents prepared by the underwriters and issuers of the securities. Relying on the pre-purchase documents, we invested in these securities with the understanding that we were purchasing higher-quality instruments than turned out to be the case. After careful consideration, we have concluded that we have an obligation to you, our members, to do everything we can to recover the value lost from investing in these securities.
Sold a box of chocolates, with a nice certification that it was in fact “AAA” chocolate.
What was actually in the box was dogcrap formed into the shape of chocolate, and coated with just enough chocolate so that on routine visual inspection and a quick sniff, all appeared to be in order.
It was only when a bite was taken later that the truth was discovered…… in this case, to the tune of a half-billion dollars out of $4.3 billion originally invested – in losses thus far.
Now that’s not a huge amount of money…. but then again, $4.3 billion is a tiny slice of the more than $1 trillion in the private-label securities out there, and an even smaller piece of the whole, including GSE paper that may also be contaminated.
We force the seller of eggs with a few that have salmonella in them to recall all of them and eat the expense of doing so. Why is it again that the Federal Government does not force all of this crap back on the securitizers?
Oh, and as for “systemic risk”? The Kanjorsky Amendment to the Dodd/Frank bill, which is now law, provides for prospective seizure and resolution of systemically-important financial institutions that would impose a risk on the system should they collapse, if there is a plausible reason to believe that such an outcome could be in the offing.
It’s time to use this authority and fix this problem.
Posted in Banks, Corruption, Economic Crisis, Economy, FHLB, Financial System, Foreclosuregate, Foreclosures, Fraud, Government, Money |
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Get Ready For More Bank Threats
Be prepared for a new round of “tanks in the streets if you don’t cut that crap out!“
The Federal Housing Finance Agency on Monday said it had issued 64 subpoenas to unnamed firms in an effort to uncover misleading statements that Wall Street banks and others may have made when they bought and packaged risky mortgages into securities. Fannie and Freddie were two of the largest investors in those securities.
And why would the FHFA have to issue subpoenas? I mean, couldn’t Fannie and Freddie just ask for the data they wanted?
The FHFA said that it had opted to issue the subpoenas after being rebuffed in earlier efforts to collect loan files.
Oh, I see. The banks were asked, and replied:
Well now why would they do something like that? You don’t think there might be something to hide, do you?
Like, perhaps, that they didn’t have good recordable titles? That they had endorsements-in-blank and thus couldn’t record them? That they either knew or had every reason to believe that the claimed levels of income and/or assets didn’t exist? That the appraisals were doctored?
Naw, none of that stuff happened, right? There weren’t any straw buyers, there weren’t any second-home riders executed on investment properties, why there wasn’t any fraud at all that was perpetrated during these years and then sold off to Fannie and Freddie, pocketing a spread and (attempting to) stick the taxpayer with a few hundred billion in losses, right?
This ought to get good.
Posted in Banks, Corruption, Economic Crisis, Fannie Mae, Federal Home Loan Bank, FHLB, Financial System, Fraud, Freddie Mac |
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FHLB Seattle Goes Where The Cops Refuse To
FHLB Seattle Goes Where The Cops Refuse To
Posted by Karl Denninger
I’m sure you all remember how clearly I have stated that I believe that mortgage origination, securities packaging and dealing was fraudulent during the housing bubble, right?
I’ve been saying it now for three years – that credit quality was flatly ignored, appraisals were intentionally rigged and borrower lies were intentionally ignored.
Well now FHLB Seattle has gone and done what no criminal prosecutor has had the balls to do – it has sued nine securities dealers. Among them are Credit Suisse, Deutsche Bank, JP Morgan and Bank of America. What is FHLB Seattle alleging in its suit?
“The bank’s complaints allege that the dealers made untrue or misleading statements about the characteristics of the mortgage loans underlying the securities,” according to the statement.
The dealers made false statements or omitted important information about the loans that backed the securities they sold, the bank alleged in its complaints. The bank claims the dealers failed to disclose that appraisals were biased upward on properties that secured mortgage loans, that underwriting guidelines were ignored by originators and that loan to property value ratios were exaggerated.
Yep. Exactly what I have said for the last three years, and what should, in my opinion, had long since led to criminal charges for alleged fraudulent conduct.
This is the second such suit – as I reported earlier the same bank and the FHLB Pittsburgh bank sued Goldman, JP Morgan and Morgan Stanley last year.
The economic mess we are in will not be resolved until these securities are recognized on bank balance sheets at their true underlying value and, where appropriate, those who falsified credit quality and other information about these securities during their packaging and sale are held to account for what they have done.
Now exactly where are all these securities and at what marks are they being held in the banks across our land?
That’s a question we all deserve an answer to.
Posted in Banks, Corruption, Economic Crisis, Economy, Federal Home Loan Bank, FHLB, Financial System, MBS |
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What Took You So Long? (Put-Backs and Blow-Ups)
What Took You So Long? (Put-Backs and Blow-Ups)
Posted by Karl Denninger
IRA put forward a nasty report on the “putback and blowup” risk issue related to the banks and fraudulent mortgages:
The wave of loan repurchase demands on securitization sponsors is the next area of fun in the zombie dance party, namely the part where different zombies start to eat one another. The GSE’s are going to tear 50-100bp easy out of the flesh of the banking industry in the form of loan returns on trillions of dollars in exposure, this as charge-offs on the several trillion in residential exposure covered by the GSEs heads north of 5%. The damage here is in the hundreds of billions and lands in particular on the larger zombie banks, especially Bank of America (BAC) and Wells Fargo (WFC).
….
The action “arises out of the alleged fraudulent acts and breaches of contract of Countrywide in connection with fifteen securitizations of pools of residential second-lien mortgages” Take particular care to savor the fact that these are second lien pools and that, where defaults have occurred on the primary mortgage, loss severities on the seconds will tend to be 100%. Or the cost could be more than par if you count the cost of remediation and recovery efforts.
Sigh…. how long does it take folks?
On April 20th, 2007 I wrote the following:
Why? Because every last one of the stated income loans that has been made can be PUT BACK ON THE LENDERS IF IT DEFAULTS.
And by the way, this is not limited to Countrywide (CFC). It applies to IndyMac, Downey, AHM, Washington Mutual and every other lender in the ALT-A space.
Let me restate that again so that everyone gets it – every single ALT-A lender is at risk of having every defaulted loan – no matter how long it has been since it was securitized and sold off – PUT back on them if there is any material misstatement in the paperwork!
To those of you who are claiming that this is a “Subprime” problem, that it is “contained”, that it is limited to “poor people who can’t pay their bills” or anything like that, let me point out that you are one hundred percent full of crap.
Emphasis in the original.
And on April 17th:
So while mortgage companies may maintain that they have “little” exposure to defaults because they sold these loans off to the bond market without recourse, if in fact 60 percent of the ALT-A stated income products have incomes fraudulently inflated by 50% or more those mortgage companies can probably be forced to take back each and every one of those loans.
HALF of all stated-income loans?
This will BANKRUPT every single one of these companies if it happens.
Now go look at the big bank’s balance sheets for second line (HELOC, silent seconds, etc) exposure. 70% of the outstanding dollar volume was written in California, Florida, Nevada and Arizona – on bubble houses. The clear majority of those have a first that is underwater and thus the recovery value on those HELOCs, if they default or are “put back” due to fraud, IS ZERO.
When you look at these large banks balance sheets and then take out of their capital the likely losses under this sort of analysis you find that every single one of them will be driven into regulatory capital trouble at best.
This is just one of the issues we have ducked instead of facing. The other big one is commercial real estate securitizations – S&P put out a report the other day in which it essentially said “if the banks have to eat the reduced value now they’re all insolvent.”
We in fact have fixed none of the underlying issues that brought down Fannie, Freddie, AIG, Bear and Lehman. The only reason we have seen supposed “improvement” in the markets is that the government has given permission to lie to financial institutions in the exact same form and fashion (that is, hiding actual liabilities and probable losses) that brought down ENRON.
But the underlying loss is still real, still present, and still out there. Refusing to recognize it doesn’t make it go away. It just sweeps it under the carpet with the hope (wish really) that the institution will be able to screw you, the consumer, out of enough money to cover the shortfalls before they’re forced to recognize the already-occurred losses and thus declare bankruptcy.
If this was all “the government” that was stuck with these bad loans that were unmarketable (since they have a zero recovery value under legal collection methods they truly can’t be sold for more than a few pennies to one of those “shark” companies that cheats on the law when it comes to those rules) we might have a situation where the government could try to shift it onto the taxpayer through opaque bailouts of Fannie, Freddie and The Fed.
But a good part of this debt was in fact securitized and distributed. Those holders, such as the FHLB that recently filed suit, aren’t the government and have no reason to sit there and absorb a loss that occurred as a consequence of allegedly-fraudulent underwriting. For that matter neither does Fannie and Freddie, as despite their “conservatorship” they remain a publicly traded corporation and intentionally absorbing losses caused by other party’s frauds could open their directors and officers up to a derivative action (read: lawsuits a-plenty.)
No folks, these losses won’t be “buried and monetized.” They will travel back up the chain to the last remaining standing organization that touched them, which just happens to be the zombie banks, since all the “independent brokers” that fed the bilge into these securitization factories are long gone, dead and buried. Thus the ticking bomb will wind up exploding on the balance sheets of those “too big to fix” institutions we refused to resolve last year because we lacked the political will to go in a close one or more of these banks, and when it happens….. it will rock our world.
You’ve had nearly three years warning Washington – and investors.
When – not if – this goes off I don’t want to hear “nobody saw it coming” from The Halls of Congress and elsewhere in DC because I will be happy to run a campaign advertisement against anyone who so bleats with a copy of my TICKERS from 2007 documenting that in fact some people did see it coming – and were intentionally ignored.
(The Supreme Court recently made such speech legal…. and for that I must extend my heartfelt thanks!)
Posted in Alt-A, Bank of America, Banks, Collateralized Debt Obligations, Corruption, Countrywide, Defaults, Economic Crisis, Economy, Federal Reserve, FHLB, Financial System, Wells Fargo |
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