Despite many lawsuits involving Wall Street banks, most do not
disclose their litigation reserve, a number crucial for assessing
their ability to cover legal costs.
From JPMorgan Chase's $13 billion settlement over mortgage
securities to lawsuits brought by bondholders, a barrage of
litigation has been raining down on Wall Street banks. Yet the banks
are not disclosing a number that is crucial for assessing their
ability to deal with those legal costs. And, curiously, the
regulator that has sway over companies' disclosure practices has not
called on the industry to reveal this important figure so that
investors can weigh the institutions' health.
The banks are choosing to settle lawsuits for their roles in
shoddy mortgage practices before the financial crisis of 2008,
paying out multibillion-dollar sums to make amends. The size of
JPMorgan's settlement with the Justice Department, struck late last
year, shocked many in the industry. Now, other large banks -- in
particular, Bank of America, with its enormous exposure to sour
precrisis mortgages -- are expected to announce painful deals with
the government in the coming months.
As these legal threats loom, the nagging question is whether the
banks have properly girded themselves for the payouts. The banks are
supposed to build up a financial cushion in advance to absorb the
estimated cost of the payouts.
Knowing the size of this cushion, called the litigation reserve,
is extremely important to outsiders trying to weigh the financial
strength of banks. For instance, if a bank's litigation reserve
turns out to be much too small for the agreed-to settlements, it
could call into question the strength and management of the bank.
Yet most banks are not disclosing the overall size of their
litigation reserves. That has left investors and analysts groping in
the dark. "I definitely feel that the disclosures around this aren't
great," said Richard Ramsden, a bank analyst with Goldman Sachs.
Banking experts say they don't think the large banks are
surreptitiously sitting on litigation reserves that are
catastrophically low. The analysts have been able to piece together
roughly how much banks have paid into litigation reserves, but it is
hard to know what the banks have paid out from the reserves to
In some instances, the payments into the reserve appear large.
Bank of America, for example, has paid roughly $50 billion into its
reserve to cover mortgage-related legal costs since the crisis,
according to Bernstein Research.
Still, even if the banks aren't facing huge shortfalls, the
failure to reveal the size of the litigation reserve is at odds with
longstanding industry practices. …