JPMorgan Chase's Settlement Was Just the Beginning

Experts are predicting that the big banks will have to shell out $50 billion to make up for their bad behavior during the mortgage bubble. Who is still on the hook, and for how much?

Jan 26, 2014 at 8:15AM

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
Do you hate your bank? If you're like most Americans, probably so. While that's not great news for consumers, it creates opportunity for savvy investors, because there's a brand-new company that's revolutionizing banking, and it's poised to kill the traditional bricks-and-mortar banking model. And amazingly, despite its rapid growth, this company is still flying under Wall Street's radar. For the name and details on this company, click here to access our new special free report.

Fool contributor Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Goldman Sachs and owns shares of Bank of America and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

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That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

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