Big banks witness soaring legal bills | The Journal Gazette | Fort Wayne, IN

Big banks witness soaring legal bills | The Journal Gazette | Fort Wayne, IN

Linda Sandler | Bloomberg News
NEW YORK – The nation’s largest 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 Chase, the nation’s second biggest bank, 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 and the trustee liquidating Bernard Madoff’s firm.

Bank of America, the largest U.S. bank, and Citigroup, ranked third, are also besieged by lawsuits stemming from the credit crisis, brought by plaintiffs such as foreclosed-upon homeowners and 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, Fla. “They’re similar to the asbestos or the tobacco industry, and they’re going to be repeatedly sued in the next few years.”

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 are 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.

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.

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.