The banking industry could be on the hook for tens of billions of dollars in legal costs if government officials apply the same regulatory standards to other banks that they have in their sweeping mortgage-fraud investigation of JPMorgan (JPM), securities analysts tell the Fox Business Network.
JPMorgan Chase & Co, the nation’s largest bank by assets, is in talks with the Justice Department to settle charges related to mortgage backed securities for $13 billion. A final deal, expected to be announced Thursday or Friday of this week, could then open up other large banks to similar litigations, analysts say.
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The reason: Many of the regulatory issues government officials are pressing against JPMorgan involve its financial-crisis purchases of Bear Stearns and the bank Washington Mutual, both at the behest of the federal government.
Several other large banks also completed similar purchases at the time including Bank of America’s (BAC) acquisition of Merrill Lynch, Wells Fargo’s (WFC) purchase of Wachovia, PNC Financial’s (PNC) purchase of National City Bank, according to bank analyst Dick Bove of Rafferty Capital Markets.
“The question that investors must ask is: ‘Will the government apply this set of precedents to JPMorgan Chase alone or will it now seek to extort funds from other banks involved in assisted mergers,’” Bove said in a note to clients on Monday.
“All of these banks are guilty of the same things as JPMorgan,” Bove said in an interview. “Forget JPMorgan, the government is going to go after every major bank with the potential civil lawsuits for tens of billions of dollars.”
JPMorgan’s record $13 billion settlement would include $9 billion in fines and penalties and $4 billion regarding allegations by the Federal Housing Finance Agency that the firm misled Fannie Mae and Freddie Mac when it sold the government sponsored entities home loans, many of which turned out to be poor investments. The settlement would not release them from a criminal inquiry.
“For the bank the on-going criminal investigation into this matter leaves it significantly at risk,” said Thomas Gorman, partner, Dorsey & Whitney LLP.
JPMorgan would still be the largest settlement, according to Bove, but he expects potential other settlements could total between $15 and $20 billion.
“The supposed settlement between JPMorgan Chase and the government affects stockholders, job holders, and the growth of the economy,” Bove said. “This could be just the beginning of the government’s activities not the end.”
The news comes after the firm announced a third quarter loss of $400 million, largely due to ongoing litigation expenses. This was the first quarterly loss under Chief Executive Jamie Dimon.
Even worse, analysts say, is the potential fallout if the government forces banks to admit some guilt, as the Justice Department is pressing in its negotiation with JP Morgan. Such a concession could be used by trail lawyers as evidence that the firm defrauded investors, and cost the big banks many more billions of dollars in both litigation costs and settlements.
“If the banks in question are required to admit guilt, it will start a literal bloodbath of civil suits that will tie up the nation’s banking system so that it will be unable to lend money to assist the growth of the U.S. economy,” Bove added