More Settlements! Where They're Coming From, and Should Investors Be Worried?

It seems like legal activities from the financial crisis have picked up over the past few months. In the most notorious case so far, JPMorgan Chase (NYSE: JPM  )  agreed to pay a $13 billion settlement in response to allegations that the bank misled investors about the quality of mortgages it was selling. 

In a settlement that has been pending for years, Bank of America (NYSE: BAC  ) agreed to pay $8.5 billion to settle other mortgage-related charges related to its acquisition of Countrywide Financial.

Most recently, it was reported that the U.S. Justice Department is preparing to file charges against Citigroup (NYSE: C  ) and Bank of America's Merrill Lynch unit. Supposedly, there is evidence that both companies marketed mortgage securities as safe while knowing their true risk level.

Where are all of these settlements and criminal actions coming from all of a sudden? How many more large sums of money will end up being paid out by the big banks? And finally, how concerned should Citigroup and Bank of America investors be about it?

Why so many settlements and charges, now?
The financial crisis occurred several years ago, and most of the "questionable" mortgages were originated between 2005 and 2007, so why are we seeing an abundance of settlements and charges now

In 2012, the Obama administration created a task force to investigate the bad home loans that were sold to investors during the housing bubble. Specifically, the questions the task force set out to answer included why certain mortgages were approved in the first place, as well as to what extent the banks knew they were selling risky assets that were labeled as investment-grade. 

It seems the answer is that the banks knew a lot. They may have known how bad the loans were. Some believe they intentionally mislead investors and ignored red flags that arose when underqualified borrowers applied for mortgages.

There was clearly a great deal of bad behavior happening during that time period on the part of the banks, and the guilty parties should be made to answer for their actions. However, as an investor, I can't help but wonder how much further this will go.

Eric Holder.

What's still to come?
According to sources familiar with the investigations, there are several other major banks that are being targeted. Royal Bank of Scotland and Credit Suisse are both under investigation for their mortgage practices. In the case of Credit Suisse, there may be evidence that shows its lending division ignored "red flags" during the loan approval process, and was simply concerned about creating more loan volume to bundle as securities.

Goldman Sachs has also stated that it is under investigation from the task force, and has said that future actions against the bank could significantly increase the company's liabilities. Attorney General Eric Holder has stated that the Justice Department intends to bring more mortgage-related cases in early 2014, but has not specified the companies targeted.

Aside from the investigation into the mortgage issue from the Justice Department task force, there are several other potential liabilities for banks, like the aforementioned Madoff charges. So, even if banks like Citigroup reach settlements related to their mortgage actions, it doesn't necessarily mean the mortgage bubble, and financial crisis are behind them.

What it means to you
As it stands now, none of this means much to investors. Most of these banks have plenty of money set aside to cover all the legal actions that could be coming. However, the concern is how much longer this will continue.

If anything, in the short term, these types of settlement deals may create buying opportunities if bank stocks dip on the news. Regardless of what happens, this situation is definitely worth monitoring, whether you are bullish or bearish on big banks.

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