Wednesday, February 6, 2013

Memo to Banks: Let's Un-settle

For spawning the global financial crisis, the big Wall Street banks have gotten off easy.  So far.  No criminal cases have been brought against high-level executives, who continue to collect their annual seven-figure bonuses.  And civil complaints against their firms have seldom resulted in admissions of wrongdoing.  Federal prosecutors have been content to cut deals with the banks, extracting vigorish of pennies on the dollar.  For the banks, it is like buying immunity.  They settle, then resume business.

That may be about to change.  Let's review the news flow:

The New York State Supreme Court is currently overseeing a settlement reached in 2011 in which Bank of America agreed to shell out $8.5 billion to settle claims regarding the securitizing and servicing of sketchy home loans.  Now three Federal Home Loan Banks have filed new documents alleging further abuses in loan-modification practices.  In particular, BofA is believed to have imposed losses on investors in first mortgages while improperly protecting second liens held by the bank on the very same properties.  The Court is free to evaluate these new claims and may decide that $8.5 billion in restitution is not enough.  (story)

A U.S. District Court in New York has ordered Flagstar Bancorp Inc. to pay $90.1 million to Assured Guaranty Ltd., a bond insurer, in a contract dispute over loans underlying $900 million in mortgage-backed securities (MBS).  In the grand scheme of things, $90.1 million sounds like a small number.  But it represents 40% of Flagstar's net income for 2012.  More importantly, it is almost 78% of the amount sought by Assured.  The biggest banks face similar litigation over representations and warranties and are not reserving anything close to 78% for received and potential putback claims.  If 78% becomes the new rule of thumb, watch out.  (story)

Congress will investigate a settlement reached last month by the Office of the Comptroller of the Currency (OCC) and the Federal Reserve that ended the Independent Foreclosure Review process for eleven of fourteen mortgage servicers.  To get out from under IFR, the eleven banks (including all the biggies) agreed to pay $9.3 billion to indemnify and forgive eligible borrowers.  Congress may decide that $9.3 billion is insufficent.  (story)

The U.S. Department of Justice has filed civil fraud charges against Standard & Poor's, the nation's largest credit-ratings agency.   The DOJ's lawsuit alleges that investors, among them federally insured financial institutions, lost at least $5 billion on collateralized debt obligations (CDO) "for which S&P issued inflated ratings that misrepresented the securities' true credit risks."  The DOJ had offered to settle for $1 billion plus an admission of guilt.  Fearing that such an admission would open the floodgates for other complaints, S&P declined to settle.  State prosecutors and the Securities and Exchange Commission (SEC) are also circling.  The banks that sold the CDOs are hoping to avoid joint and several liability for the rigged ratings.  (story)

UBS reported a Q4 loss of $2 billion thanks to legal costs. (story)

Barclays has set aside another $1.6 billion for legal costs.  (story)

RBS has just been fined $612 million for rigging interest rates, less than UBS but more than Barclays for the same offense.  The DOJ extracted a guilty plea on this one.  (story)

Who's next?  Among the European banks, Deutsche Bank.  In the U.S., Citigroup and JP Morgan Chase are under investigation.  (story)

The hits will keep on coming.

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