New Legal Woes Bring Banks Down a Notch

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They're baaaack.

Lawsuits are the top stories for most of the Big Four banks this week, with all of the named defendants seeing red. Of course legal troubles never really went away for the banks, but economic news, record-high earnings, and other lead stories had certainly put them in the background for at least a little bit. But during a week with little else to focus on, investors are left with the legal matters on the top of their minds.

Not playing fair
Bank of America (NYSE: BAC  ) is being sued by both the Department of Justice and the Securities and Exchange commission over $850 million in mortgage-backed securities contending that the bank hid pertinent facts from investors about the loans backing the mortgage bonds. The complaint filed by the DOJ notes that the bank included risky Alt-A mortgages in the securitization, despite repeated warnings from traders that the loans were not suitable. 

Unlike the other legal battles over MBSes, this suit is directly against Bank of America, not its troubled Countrywide division. The suit alleges that B of A did not meet its own loan underwriting standards for the majority of the mortgages in questions, with 70% of them coming through the bank's wholesale channels -- meaning third parties were the actual originators of the loans.

Kick the can
JPMorgan Chase  (NYSE: JPM  ) has been named in a second lawsuit over aluminum price manipulation. The Florida suit also names Goldman Sachs (NYSE: GS  ) for its participation in alleged manipulation of stockpiles of aluminum in its warehouses. The case against the banks stems from customer orders being backlogged and ultimately not fulfilled in a timely manner, forcing purchases of aluminum at spot prices on the market, despite already technically owning the metal in the banks' warehouses. JPMorgan has already made its moves to exit the commodities business, but the legal implications of its participation since the early 2000s may linger on.

Lending a helping hand
Wells Fargo (NYSE: WFC  ) wrapped up a second trial over its securities lending program this week. Investors claimed that the bank advertised the program as a safe investing option, misrepresenting the risk and causing them to lose millions. This is just the second of at least five such cases filed against the bank, with Wells losing the first case that went to trial and paying Minnesota Workers' Compensation Reinsurance Association and three other foundations $30 million. The current case is in jury deliberations as of this morning, and two more cases are scheduled to begin next year.

Legal woes
Investors have had to deal with the banks' legal issues since before the financial crisis. But now that new cases are being brought against the banks -- woes that may not qualify as legacy issues -- there's a new layer of uncertainty clouding the investment opportunities posed by the Big Four. Though these may just be more bumps in the road, make sure you're comfortable with the legal risks each of these banks carry with them.

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9/27/2016 3:00 PM
BAC $15.30 Up +0.21 +1.36%
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WFC $44.98 Up +0.10 +0.22%
Wells Fargo CAPS Rating: ****