JPMorgan Legal Bills $5.2 BILLION, Menacing Profits

COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary

“They’re under legal attack,” said Richard Bove, an analyst at Rochdale Securities in Lutz, Florida, who rates JPMorgan’s stock a “buy.” “They’re similar to the asbestos or the tobacco industry, and they’re going to be repeatedly sued in the next few years.”

EDITOR’S COMMENT: In plain English, litigation is rising, losses are rising and the overall trend for the banks is BAD. The flip side is that the class actions, individual lawsuits, AG prosecutions, DOJ prosecutions and criminal and civil investigations are still revealing more information that helps homeowners make their claims.

The collateral benefit of homeowners getting a free house outweighs the political fallout. We are in crisis mode and things are getting worse this year with the prospect of massive defaults on municipal bonds. The housing market is still dropping, the economy is not really in recovery despite claims to the contrary, and jobs are hard to find for most Americans looking for a decent job with a decent salary. The first step in reversing this mess is actually resolving the housing crisis now. The answer is obviously not more foreclosures.

Given the support of those courageous enough in government to take on the huge banking lobby, people are presenting valid legal challenges to their mortgages, their foreclosures and the auction of their property. So far the pattern continues — no case goes to trial. Any homeowner who persists and presents a credible threat gets a settlement under seal of confidentiality. So far the total cost of those settlements represent no more than part of a rounding error in the grand scheme of securitized receivables involving trillions of dollars.

So who gets charged for these bills? Not the executives who created this mess. The victims of this mess are investors who own stock in the banks, investors who bought bogus mortgage backed securities and homeowners who bought bogus loan products. Accountability — the flagship of Republican politics — seems to count only when it involves the little guy, the ordinary Joe. It doesn’t apply to the leaders of megabanks who defrauded investors, then defrauded borrowers, then defrauded the taxpayers.

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JPMorgan Legal Bills Soar in Financial Crisis Aftermath, Menacing Profits
By Linda Sandler – Jan 6, 2011 9:17 AM ET

JPMorgan Legal Bills Soar in Credit Aftermath

JPMorgan, the second biggest bank by assets, reported $5.2 billion of legal costs in the first nine months of 2009, compared with a gain of $10 million in the same period a year earlier. Photographer: Jin Lee/Bloomberg

(Corrects year of costs in second paragraph.)

JPMorgan Chase & Co. and the biggest U.S. banks face billions of dollars in legal costs related to their role in the financial crisis, threatening their profits and the stock price gains they made in 2010, analysts said.

JPMorgan, the second biggest bank by assets, reported $5.2 billion of legal costs in the first nine months of last year, compared with a gain of $10 million in the same period a year earlier. The costs would rise if the bank reserves for multibillion-dollar lawsuits by Lehman Brothers Holdings Inc. and the trustee liquidating Bernard L. Madoff’s firm.

Bank of America Corp., the largest U.S. bank, and Citigroup Inc., ranked third, are also besieged by lawsuits stemming from the credit crisis, brought by plaintiffs ranging from foreclosed-upon homeowners to institutional investors whose mortgage-backed bonds turned out to be money-losers.

“They’re under legal attack,” said Richard Bove, an analyst at Rochdale Securities in Lutz, Florida, who rates JPMorgan’s stock a “buy.” “They’re similar to the asbestos or the tobacco industry, and they’re going to be repeatedly sued in the next few years.”

JPMorgan rose about 1.8 percent in 2010, while the Standard & Poor’s 500 Bank Index climbed 18.7 percent and Citigroup gained 43 percent. Both banks are based in New York. Bank of America, based in Charlotte, North Carolina, fell 11.4 percent, while San Francisco-based Wells Fargo & Co. rose 14.8 percent, according to Bloomberg data.

Cost of Business

JPMorgan’s third-quarter net profit of $4.4 billion, up 23 percent from the year earlier, would have been larger if it hadn’t set aside $1.3 billion of pretax income for lawsuits and $1 billion for mortgage repurchases. Banks haven’t yet reported their results for the fourth quarter.

Litigation “ain’t going away,” Chief Executive Officer Jamie Dimon told analysts on an Oct. 13 conference call. “It’s becoming a cost of doing business.”

At least JPMorgan’s shareholders are more likely to be informed about legal expenses than some other bank investors. The bank, which used the word “litigation” about 50 times in its latest 10-Q filing with the Securities and Exchange Commission, discloses more about lawsuits’ effect on results than Citigroup or Wells Fargo, and has been taking larger reserves than some rivals, according to company filings.

Array of Suits

Stephen Cutler, JPMorgan’s in-house lawyer and a former SEC enforcement chief, declined to comment through bank spokesman Joseph Evangelisti.

Bankrupt Lehman is claiming $8.6 billion in collateral from JPMorgan plus tens of billions of dollars in damages, while Madoff trustee Irving Picard is demanding $6.4 billion on the grounds that JPMorgan aided and abetted the biggest Ponzi scheme in history.

Almost nine pages of JPMorgan’s third-quarter 10-Q deal with legal issues. They range from home foreclosure investigations by state officials, to shareholder lawsuits against Bear Stearns Cos., which JPMorgan bought in 2008, to suits from nine different Federal Home Loan Banks demanding compensation for mortgage-backed securities bought from JPMorgan, Bear Stearns or Washington Mutual Bank, also purchased in 2008.

Investors concerned that they aren’t getting enough information to assess litigation risks spurred the Financial Accounting Standards Board to issue proposals last year that would make banks estimate legal losses and say how much they’re putting aside. The FASB, based in Norwalk, Connecticut, sets accounting rules for public companies under authority delegated by the SEC.

Expensive Season

The coming year may be the most expensive litigation season since 2005, when JPMorgan and Citigroup each spent about $2 billion to resolve a lawsuit accusing them of helping energy trader Enron Corp. hide billions of dollars in debt from investors. JPMorgan said in its 2009 annual report it got some money back from insurers for the two settlements.

This year, though, the usual fraud and mismanagement suits are dwarfed by the potential liabilities stemming from the collapse of the housing market. Litigation may force banks to pay back about $134 billion for so-called private-label mortgage loans, said Chris Gamaitoni, a bank analyst at Compass Point Research & Trading LLC in Washington. Such loans are considered riskier than mortgage loans issued by Fannie Mae or Freddie Mac.

Book Value

For JPMorgan, its $24 billion share of the potential losses would equal 13 percent of its book value, Gamaitoni said. Bank of America’s $35 billion of possible losses would be 17 percent of book value, he estimated.

While bank stocks rose about 3 percent this week after Bank of America paid $2.8 billion to settle loan disputes with Fannie Mae and Freddie Mac, the banking industry’s liability could be almost five times greater on private-label mortgage loans, Gamaitoni estimated.

“Private-label losses on loans are much higher and therefore the liability from lawsuits is a much larger percent than in the agency market,” he said. “On a book value basis it would be more negatively impactful. If there is a large private- label settlement or court case, the stocks will react negatively. There will be an earnings headwind.”

Bank of America reported $1.2 billion in litigation costs for the nine months through Sept. 30, excluding fees to outside law firms. It is suing or being sued in 5,696 legal proceedings in federal court, compared with JPMorgan’s 3,757 lawsuits, according to data compiled by Bloomberg.

Litigation Expenses

Cases for which Bank of America has already reserved some money may wind up costing the bank $400 million to $1.9 billion more than it has set aside, according to its 10-Q. The bank’s nine-month litigation cost of $1.2 billion compared with $477 million a year earlier.

“Our litigation-related expenses are cyclical and are not attributable to a single factor,” said Bank of America spokesman Lawrence Grayson.

Citigroup, now dealing with 1,713 federal court proceedings according to Bloomberg data, tries to settle lawsuits, the bank said in a filing. Shannon Bell, a spokeswoman for Citigroup, declined to comment.

Wells Fargo, the fourth biggest bank, is involved in 2,758 lawsuits, according to Bloomberg data. Mary Eshet, a Wells Fargo spokeswoman, declined to comment.

JPMorgan’s litigation reserves are an “estimate” that, “if wrong, could cause unexpected losses in the future” from lawsuits, fines or penalties not covered by insurance, according to its latest 10-K.

Fight for Right

Dimon articulated the bank’s approach to lawsuits in the October analyst call.

“When we’re wrong, we’re going to settle, and when we’re right, we’re going to fight,” he said.

JPMorgan was the last major underwriter of WorldCom Inc. securities to settle suits started in 2002 after an $11 billion fraud sank the long-distance telephone company and sent Chairman Bernard Ebbers to prison.

Banks have leeway under current accounting rules to report litigation costs, or not. Citibank and Wells Fargo don’t give a dollar amount for legal costs; JPMorgan and Bank of America do.

Among other things, the FASB proposal would force banks to report the basis for the legal claim, the amount being claimed and how the company will defend itself. Banks will have to regularly update their estimated loss, and when it might occur; and in cases where they are “reasonably” likely to lose, they have to estimate their possible range of loss and say how much they’ve put aside to pay for it.

Mission of FASB

“The mission of the FASB is to establish financial accounting and reporting standards that provide useful information to investors,” said Bill Hildebrand, a FASB staff member, in a telephone interview. Hildebrand couldn’t say when the proposal might become a rule.

JPMorgan currently is fighting Lehman’s lawsuit, which alleges the bank and Dimon helped cause its failure by siphoning off badly needed funds.

JPMorgan twice asked a judge to dismiss the suit, saying it took the $8.6 billion in collateral from Lehman under a contract to clear trades for Lehman’s brokerage. So-called safe harbor laws protect a clearing bank from being sued if a brokerage client fails, the bank said in court papers.

U.S. Bankruptcy Judge James Peck in Manhattan, who hasn’t yet ruled on JPMorgan’s request for dismissal, has at least three times rejected the safe harbor defense in other cases. Bank of America was ordered to return $500 million of deposits to Lehman, and pay $90 million in interest.

Madoff Trustee

Madoff trustee Irving Picard sued JPMorgan on Dec. 2, saying the bank aided the now-imprisoned con man’s fraud from its position “at the very center of that fraud” when it acted as the Madoff firm’s banker.

The trustee unraveling the remains of a $3.5 billion Ponzi scheme run by Thomas J. Petters has also accused JPMorgan of gaining about $280 million from that scam.

Bank of America’s legal proceedings cover five pages of its latest 10-Q — and 11 pages of small print in a footnote to its latest annual 10-K filing, under Note 14. Like the other banks, it says it may be exposed to losses “in excess of any amounts accrued” for legal liabilities.

Like JPMorgan, Bank of America inherited lawsuits from companies it bought: Countrywide Financial Corp. and Merrill Lynch & Co. Together, they’re facing lawsuits alleging they misled investors in offering documents for more than $375 billion in mortgage-backed securities, the bank said.

Allstate Corp. sued Bank of America and Countrywide on Dec. 28 over $700 million in mortgage-backed securities the insurer bought.

Current Accounting Rules

Like other banks, Citigroup said it follows current accounting rules in setting up litigation reserves “when those matters present loss contingencies that both are probable and can be reasonably estimated,” adjusting the reserves as new information comes in.

Citigroup still faces 14 billion euros ($18.4 billion) of claims for damages resulting from the 2003 bankruptcy of Italy’s biggest dairy company, now called Parmalat SpA, according to the bank’s 10-K annual regulatory filing.

Citigroup in another Parmalat case won $431 million by countersuing, it said in the filing.

Lehman’s case against JPMorgan is Lehman Brothers Holdings Inc. v. JPMorgan Chase Bank NA, 10-03266, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The Madoff case is Picard v. JPMorgan Chase & Co., 10-ap-4932, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Linda Sandler in New York at lsandler@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net

10 Responses

  1. @E.Tolle… why are you so surprised… its the Chicago elite… thats what the people elected and thats what the people get! Thug’s in every facet of your existence.

  2. Simon Johnson writes:

    Most smart people in the nonfinancial world understand that the big banks have become profoundly damaging to the rest of the private sector. The idea that the president needed to bring a top banker into his inner circle in order to build bridges with business is beyond ludicrous.

    Bill Daley now controls how information is presented to and decisions are made by the president. Daley’s former boss, Jamie Dimon, is the most dangerous banker in America — presumably he now gets even greater access to the Oval Office. Daley is on the record as opposing strong consumer protection for financial products; Elizabeth Warren faces an even steeper uphill battle. Important regulatory appointments, such as the succession to Sheila Bair at the FDIC, are less likely to go to sensible people. And in all our interactions with other countries, for example around the G20 but also on a bilateral basis, we will pursue the resolutely pro-big finance views of the second Clinton administration.

    Top executives at big U.S. banks want to be left alone during relatively good times — allowed to take whatever excessive risks they want, to juice their return on equity through massive leverage, to thus boost their pay and enhance their status around the world. But at a moment of severe financial crisis, they also want someone in the White House who will whisper at just the right moment: “Mr. President, if you let this bank fail, it will trigger a worldwide financial panic and another Great Depression. This will be worse than what happened after Lehman Brothers failed.”

    Let’s be honest. With the appointment of Bill Daley, the big banks have won completely this round of boom-bust-bailout. The risk inherent to our financial system is now higher than it was in the early/mid-2000s. We are set up for another illusory financial expansion and another debilitating crisis.

    Bill Daley will get it done.

    This was an act of terrorism from my viewpoint by Obama. He has surrounded himself with the very people who are bringing down our country and our way of life. I voted for this idiot! One term if I have anthing to say about it. Revolution….I see no way out of it. Prove me wrong!

    http://www.huffingtonpost.com/simon-johnson/bill-daley-obama-chief-of-staff_b_806341.html

  3. “Private capital will return to the residential housing finance market when trust, transparency, and auditablity are restored or established. The truth be told we have had this ability for quite a while with the industry utility, MERS. Instead our industry is pushed to the brink of catastrophe before it acts, or worse legislated.”

    I thought this guy actually “got it” until the last phrase (or worse, legislated) . Why is legislation so evil after what your cronies on Wall Street/MERS have created?

    http://www.mortgagenewsdaily.com/channels/voiceofhousing/156032.aspx

  4. DEC. 17, 11:15 a.m.: David Graham just slayed Goliath in small claims court. The Big Bear City resident, with the help of Alan Sims of the Center for Litigation and Consumer Real Estate Education, took Graham’s mortgage lender, Bank of America’s BAC Home Loans Servicing LP, to court and won Friday, Dec. 17.

    Graham sued the mega bank for fraud because he was put into a loan modification program by Bank of America when the bank knew from the start he did not qualify. Judge John Pacheco ruled that Bank of America is in violation of Californa Civil Code 1565-1590, particularly 1572, suppression of facts and 1575, undue influence.

    The judge awarded Graham $7,595. This is the first known case where Bank of America has been found guilty by reason of fraud.

    Sims acted as a professional witness in the case. He says Bank of America committed fraud because there is a simple calculation from the start that determines whether someone is qualified for a loan modication. The lender has 90 days to tell the client whether the loan modification is approved.

    Bank of America’s representative, mortgage service specialist Anthony Lopez, admitted in court that the lender continued to accept modified payments for six months after the bank determined Graham was not approved for the modification. Sims says that the representative said on record that the bank staff is not trained well enough to facilitate the loan modification rejection within six months. Audio recordings of the testimony should be available by Dec. 20, Sims says.

    “They had prior knowledge,” Sims told The Grizzly. “That is the key to proving fraud and getting a conviction.” Bank of America is expected to appeal.

  5. […] This post was mentioned on Twitter by Eva Miranda. Eva Miranda said: JPMorgan Legal Bills $5.2 BILLION, Menacing Profits « Livinglies's …: “They're under legal attack,” said Richa… http://bit.ly/grYqzL […]

  6. well put Gwen!!, could not agree more with you on that one, these bastards KNOW and are totally aware of what they have done wrong, but play their game against all odds, this one I’m happy to say they are loosing it, one step at the time!!

  7. gwen caranchini,

    You describe a very typical scenario. And, to add to it — many judges do not want to decide these cases — so they push for settlement — which the banks will not do — and cases linger on and on — with, sometimes, more legal fees paid than a settlement would even cost. It is another example of abuse, by the banks (and their attorneys – if they even represent the banks — often not sure who they really represent), of the court system.

    The banks try to wear you down. Sounds like they do not know, in your case, who they are dealing with!!! Good for you!!!

  8. One thing I learned i practicing law for 30 years, defendants over defend and refuse to settle even when everything is against them. This is the case here with these legal fees. I use my own small quiet title action as an example. BOA/BAC have three att loclly on the case in addiion to a St. Louis oversite attorneyfor Bryan Cave. They have done nothing since may except procedurally trying to gain the upper hand–no discovery of any kind. They are about to loose the procdural “game”. They have little if any chance of winning. Although I have attempted to settle before the lawsuit as even filedby sending a detailed settlement agreement with proposals, they have never responsed. ther is a court ordered fed magistrate settlemen conf coming up and if the case gets remanded or is back in state court by then, there is a state court mandated settlment. There is next to no chance of settlement on their terms as they can’t if discovery was evn commence produce the note, show it hs value, show how they did not engage in false collection of monies when the note was paid off. It reminds me of a case I had 15 years ago. I offerd to settle for $32,000 for my whistleblowing civil rights client in a local town. They ranted and raved. They hired a law firm (oe of the same ones involved now in my case) to defend who had multile attorneys involved. They took an interlocutory appeal to the 8th cir., lost, after mts of discovery they filed sj and the court told them they did not have a scintilla of ev but would le them try the case. They lost and the jury told them they had no ev. They appealed to the 8th cir, lost and then to the S.Ct., lost and then it was set for trial again ad during trial they were forced to settle for a “signifiant 6 figure sum approachinga 7 figure sum” four years after I offered $32,000. They incurred I understand almost $2m in defense costs including paying the city attorney’s law firm beyond the defense firm. THIS IS BOA–They claim it is frivolos lawsuits or they claim plantiff’s run up the costs–trust me in 30 years that’s not th case–its the defendants refusing to settle when they should. By the way the law firm would not eve talk to the jury to learn what they did wrong!

  9. First of all, can I say I hate Bloomberg?

    Secondly, let’s find the world’s tiniest violins, so as to play for our poor, depraved bankers.

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