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JPMorgan Chase's Settlement Was Just the Beginning

The various settlements that the big banks in the aftermath of the financial crisis have agreed to pay out has become a hot topic. Settlements are ranging from six digits to as high as 11, in JPMorgan Chase's (NYSE: JPM  ) case, and are being paid to a variety of recipients for a variety of reasons. In a recently published report, several anonymous Wall Street insiders estimate that the total of all bank settlements related to the crisis could end up being in the neighborhood of $50 billion.

Individual cases
It's tough to tell with any certainty how much any individual bank may be on the hook for, but a good indicator might be how many mortgage-backed securities, or MBSes, were issued during the pre-crisis years.  For instance, JPMorgan, which has already settled its cases, issued more than $460 billion in MBSes between 2005 and 2008.

However, the biggest player in the MBS arena during those years was Bank of America (NYSE: BAC  ) , which issued a staggering $637 billion in MBSes.  According to analysis by lawyers involved in the matter, Bank of America could settle for around $11.7 billion in penalties, in addition to around $5 billion in relief payments to homeowners affected by the crisis.

Investment-banking giants Morgan Stanley (NYSE: MS  ) and Goldman Sachs (NYSE: GS  ) are on the hook as well. Morgan and Goldman were the fourth and fifth largest MBS issuers, with Goldman issuing about $121 billion worth and Morgan Stanley issuing $96.5 billion in securities. Both banks are expected to be liable for at least $3 billion apiece, with about one-third of the settlement amounts going to consumer relief. 

It wasn't just U.S. banks that behaved badly. Royal Bank of Scotland (NYSE: RBS  ) could face penalties of up to $10 billion for their role in the financial crisis. 

It remains to be seen whether any of these banks will ultimately settle for an amount close to those mentioned here, or if they'll decide to let the lawsuits play out on their own. Different banks are being accused of different types and degrees of wrongdoing, which could affect how each institution decides to proceed.

Is it planned for, or will it kill profits?
The good news is that for the most part, these banks all saw this day coming and set aside a reserve fund specifically earmarked to pay for any legal obligations. However, the fear is that in some cases, the settlements may be more than the banks had planned on. A good example is the JPMorgan settlement with the government. Originally estimated to be in the range of $7 billion to $10 billion, the penalty ended up being $13 billion -- in addition to the $2.6 billion the bank agreed to pay for its role in the Bernie Madoff scandal, which itself ended up being much more than the originally speculated sum of around $2 billion.

Foolish final thoughts for investors
The effect on the banks' bottom lines remains to be seen. Bear in mind that all of these companies have an army of smart lawyers who are running the numbers and telling the companies what they should expect to pay out. In other words, the banks are planning for these expenses and then some -- and in pretty much all cases they already have the cash set aside.

The only things that could adversely affect the banks further would be a prolonged legal battle, should any of the companies decide not to settle or if the final settlement amount ended up being drastically higher than expected. While the banks have been pretty good (so far) about predicting settlement amounts, this is definitely worth keeping an eye on as things plays out. A lower-than-expected settlement could mean that billions in reserved cash stays with the banks, and a worse-than-expected settlement could eat into profits very badly.

Get the last laugh on banks
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Read/Post Comments (7) | Recommend This Article (1)

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 January 26, 2014, at 10:36 PM, Oregonboy wrote:

    $5 billion in relief payments to homeowners affected by the crisis.? You mean these homeowners signed a contract for a new home that they could not afford, then defaulted and are now expected to get a refund? Nonsense, you are just starting to see counter-sue by banks and other entities that are entitled as a result of these MBS. People that are liable better lawyer up. BoA has already said they will just bankrupt Countrywide without any heartburn. Done and done!!

  • Report this Comment On January 27, 2014, at 3:48 AM, shiznaw wrote:

    It's not the amount of money your morons, but the Degree of Power the Banks hold that's the Problem. What the Heck don't You supposed Financial Journalists Not Get about This?

    Aren't you guys supposed to have a degree in investigatory sleuthing or something? Maybe a trade school certification in Common Sense is more apropos.

  • Report this Comment On January 27, 2014, at 9:51 AM, hambone1969 wrote:

    I love that we are still conveniently ignoring that TWO parties are involved in a mortgage. The bank and the PERSON. See, someone asked for a loan, filled out paperwork, went to a closing, SIGNED ON THE DOTTED LINE, and accepted the terms. IF they were so cheap and ignorant as to not bring a real estate attorney with them to read the pages one by one to them so that they UNDERSTOOD what they had asked for and now were committing to, then too effin bad. Live and learn.

    Again, these were mortgages willingly applied for and committed to. NO ONE was kidnapped at 2AM at gunpoint, and forced to sign a mortgage written in Chinese.

  • Report this Comment On January 27, 2014, at 9:54 AM, whyaduck1128 wrote:

    The fines mean absolutely nothing to the banks so long as no one goes to jail and they can find a way to deduct the fines on their corporate taxes (and they will).

    As long as Jamie Dimon, God of Banking (TM), gets a huge RAISE for presiding over this CF, and he and his friends just go about their chauffeur-driven business, with in-season weekends in the Hamptons and trips to Davos (all undoubtedly at shareholders' expense and ultimately that of the taxpayers), these fines are just numbers on paper.

    So the MBS business is gone; they'll find another scam. That's what scammers do. The only time these con men stop is when they're in the Graybar Hotel. And we know that will never happen, because regardless of what party is in power in Washington, the Masters of the Universe will have friends there.

  • Report this Comment On January 27, 2014, at 9:56 AM, whyaduck1128 wrote:

    hambone--Your point is valid, but the person taking out the mortgage being stupid does not absolve the mortgage company from being at best greedy and at worst criminal.

  • Report this Comment On January 27, 2014, at 12:56 PM, honestyproject wrote:

    The banks have more than enough set aside for future litigation. Well got caught doing a transaction with a Mexican drug cartel. This "shadow banking" transaction generated $367 billion. This money was not taxed. Regulators will not put pressure on the bank to reveal how much they have set aside. People were put into loans. They didn't shop for these loans. When they tried to get out of the transactions, the OTS would not respond to complaint because they were funded by the banks. The stimulus money and the bailout money should have gone the 99% in the form of grants. This money would have been spent, saved, or invested by the 99% and two bird could have been dispatched with one shot. Unemployment and homelessness would no longer be an issue. This can still be done if the banks are made to release the money that they have set aside. Each person in the 99% could be given a one time grant for $100,000. The 10 largest banks have at least $100 trillion set aside for future litigation. It would cost $35 trillion to get it done.

  • Report this Comment On January 27, 2014, at 2:34 PM, ranndino wrote:


    This is a very crappy argument that we keep hearing from the baksters side. These mortgage contracts are extremely complicated. Most people don't have the time or the knowledge to understand them. So while it doesn't absolve the PERSON of responsibility I feel the bankers who gave those mortgages to people with full knowledge and understanding of what they were doing (they're experts... it's their job) are guilty of fraud and deserve to go to prison.

    Let me give you an analogy. You go to a mechanic. He's an expert in cars. He tells you that you need to pay him $3500 to fix your car when you thought you only had damage totaling $600. He is an expert while you are not. He knows he's full of crap, but for you to know that it would require you to become as competent as he is at fixing cars. If you pay him this money he didn't force you at gunpoint either, but he's acted unethically and is guilty of fraud. You should be able to sue him for damages.

    Somehow the rich are always incensed when someone defrauds them of a few hundred bucks or steals their TV, but when people get taken for hundreds of thousands of dollars, which completely destroys their life, the fraud isn't fraud at all, but just run of the mill business practice. Complete lack of self awareness and ethics.

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Matthew Frankel

Matt brought his love of teaching and investing to the Fool in order to help people invest better, after several years as a math teacher. Matt specializes in writing about the best opportunities in bank stocks, real estate, and personal finance, but loves any investment at the right price. Follow me on Twitter to keep up with all of the best financial coverage!

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