Many Banks Don't Reveal Amount Set to Cover Suits ; 'Litigation Reserve' Helps Investors and Analysts Gauge Company's Strength

By Eavis, Peter | International New York Times, January 18, 2014 | Go to article overview

Many Banks Don't Reveal Amount Set to Cover Suits ; 'Litigation Reserve' Helps Investors and Analysts Gauge Company's Strength


Eavis, Peter, International New York Times


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 settle cases.

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. …

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