| NEW YORK
NEW YORK Jan 17 Several large U.S. banks have
set aside extra money to pay for potential legal costs in part
because of JPMorgan Chase & Co's massive $13 billion
settlement with U.S. authorities over bad mortgages, according
to two sources familiar with the situation.
The size of the JPMorgan settlement, which the government
called the largest in U.S. history, led many banks to realize
that the cost of resolving some of their own legal problems was
likely to be higher than they had initially believed, the
Justice Department officials have said in public statements
they want to use the JPMorgan settlement as a template for deals
with other banks.
Bank of America, Citigroup, Goldman Sachs
and Morgan Stanley all added hundreds of millions
of dollars to funds they have set aside to pay for the cost of
litigation, including legal fees, fines and settlements. All
four banks are facing mortgage-related investigations by federal
prosecutors located in different parts of the country.
The increase in such funds impacted the fourth quarter
results of the banks published this week, surprising many
The total amount of the four banks' increases in litigation
reserves could not be determined because the banks reported them
in different formats. A U.S. Securities and Exchange Commission
rule says companies must only reserve funds for losses that are
"probable and estimable," but does not require companies to
disclose how the reserves match their specific expectations.
Spokesmen at all four banks declined to comment.
The additions to legal reserves show how cases related to
practices that sometimes date back to before the financial
crisis are likely to continue to cause pain to the U.S. banking
industry. U.S. and European regulators fined banks record
amounts last year, imposing penalties and settlements of more
than $43 billion as authorities work more closely across borders
to clean up the financial sector.
The U.S. government's Residential Mortgage Backed
Securities Working Group, a network of federal and state
prosecutors and investigators set up in 2012, has been poring
over records and testimony relating to residential
mortgage-backed securities (RMBS). Many of these assets were
stuffed with home loans that were badly underwritten and issued
in the years leading up to the crisis.
"Where the industry thought they were at the tail end of it
there's reason to wonder whether there's a whole new round of
broader suits that may be brought," said Joshua Rosner, a
managing partner at Graham Fisher & Co, an independent research
Goldman Sachs said its net provisions for legal expenses in
2013 amounted to $962 million, up from the $448 million it
reserved throughout 2012. Bank of America said it had added $2.3
billion to its reserves during the fourth quarter, up from $1.1
billion in the third quarter. Citi added $809 million in the
fourth quarter after adding $677 million in the third quarter.
Morgan Stanley added $1.2 billion in the fourth quarter to
its litigation reserves, and specifically cited investigations
"related to residential mortgage-backed securities and the
credit crisis" as the motivation for doing so.
Citigroup Chief Financial Officer John Gerspach said in a
conference call with analysts to discuss quarterly earnings that
he expected the bank's legal expenses relating to its "legacy
assets" would "remain elevated." Legacy assets include
mortgage-backed securities that the bank packaged and sold
before the crisis.
"It's driven by the higher level of litigation-related
activity throughout the industry," Gerspach said on Thursday,
adding that Citi's consideration of the landscape had included
"things that you've seen hit the press as far as the industry."