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The Hangover Continues: $20 Billion-Plus Robosigning Settlement?

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Just when you think banks should run out of shoes to drop, they give you a reason to think they're centipedes.

The latest case of falling footwear involves a potential liability of $17 billion or more from civil lawsuits related to foreclosure methods such as robosigning. Some government officials are pushing for a settlement of more than $20 billion. On top of that, the Justice Department is asking for another $500 million to $1 billion in penalties. Justice and the Department of Housing and Urban Development could potentially file claims for billions more. Banks had hoped to settle for $5 billion, but federal and state officials have dismissed that proposal.  

But, hey, $20 billion or thereabouts must be pocket change to an industry that received hundreds of billions in TARP bailout funds, right? Not so fast. For the first quarter -- banks' most profitable since before the financial crisis—the industry earned $29 billion.

The usual suspects
The banks at risk of having to pay out billions to settle include the usual suspects: Bank of America (NYSE: BAC  ) , JPMorgan Chase (NYSE: JPM  ) , Citigroup (NYSE: C  ) , and Wells Fargo (NYSE: WFC  ) . That said, based on the value of residential mortgages as a percentage of total capital, some of these suspects could be more exposed than others:


Residential Mortgages
(in millions)

Total Capital
(in millions)

Residential Mortgages as % of Total Capital

Wells Fargo $326,384 $147,100 222%
Bank of America $274,536 $229,094 120%
Citigroup $151,469 $162,219 93%
JPMorgan Chase $134,284 $182,216 74%

Source: Capital IQ, a division of Standard & Poor's.

Foolish takeaway
The cost to settle charges surrounding improper foreclosure practices could be a huge negative surprise -- and earnings drag -- for banks and their investors.

How many more shoes will banks drop? Fee income is under pressure. Loan demand could remain weak for years. Real estate continues to struggle. Excluding "provisions" (one-time items and unsustainable loan losses), banks' profits are in trouble. The value of assets on their books is suspect. Now the robosigning scandal could lead to fines and penalties that add up to more than two-thirds of their first-quarter profits. With all these potential pitfalls ahead, investors should be wary of buying into bank stocks -- at least until that last loafer finally hits the floor.

To make it easier for you to keep an eye on these and other stocks, you can get free up-to-date stock news and analysis from The Motley Fool. Click below to add these companies to your watchlist now:

Fool contributor Cindy Johnson has been underweight financials since 2008. She does not own shares in any security in this story. No way. The Motley Fool owns shares of Wells Fargo and JPMorgan Chase. The Fool owns shares of and has opened a short position on Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 31, 2011, at 1:46 PM, jasenj1 wrote:

    Yes. The banks should burn, burn, burn for what they've done to the real estate market. Some executives should land in jail, too. It's one thing to take $$$ out of the company you've managed into the rocks, it's another to personally spend time in prison.

    And shareholders ought to rise up and boot the bums out cutting off their golden parachutes for mismanaging the companies.

  • Report this Comment On June 07, 2011, at 9:56 PM, Senka1 wrote:

    Prosecuting Wall Street investment banks and their “geniuses” is not only a matter of democracy, but more importantly, it is about survival of America that we all love…and the only path for our kids’ future.

    Today we are facing the greatest threat to our way of living, threat for our kids’ future. The banks, together with our government brought America to its knees and we have to stand up together and demand justice! There are two Registers of Deeds who are demanding answers from MERS, BofA and the rest of them ~ John O'Brien and Jeff Thigpen!

    The truth shall prevail -

    MERS lies and robo-signing are coming to an end! People arefighting back:

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