The Most Banks Could Pay For Causing The Crisis Is Still A Fraction Of The Cost Of The Crisis


Outstanding suits over mortgage trading that helped precipitate the financial crisis could cost eight of the country’s biggest banks a hundred billion dollars more than they have already paid in such cases, according to a report last week from Standard & Poor’s (S&P;). If that high-end estimate proves accurate, the biggest banks in America will have resolved all crisis-related accusations against them for just 3 percent of the most conservative estimate of what the financial crisis cost the economy.

The ratings agency estimates that future settlements with regulators and investors will cost eight of the biggest banks somewhere between $56.5 billion and $104 billion. Those banks are currently holding over $150 billion in reserve to cover possible legal bills.

The projected future tab comes atop the roughly $80 billion banks have already paid in legal bills related to the crisis that cost the economy more than $6 trillion. One tally from August put banks’ legal bills tied to the crisis at $66 billion since 2010, and in November the Justice Department officially settled a variety of complaints against JP Morgan (JPM) in a deal that will cost the bank $13 billion on paper but far less in reality. Tax deductions and easily-fudged consumer relief components of the deal reduce the actual hit to JPM’s bottom line to about $5 billion — an amount that the bank has already made up in market value terms thanks to a big jump in its stock price since the settlement was first announced.

The government wants to use that JPM deal as a template for future settlements with other banks around similar misrepresentations and double-dealing in the mortgage-backed securities business during the pre-crisis housing bubble. That means that the future deals would likely feature the same smoke-and-mirrors qualities and banks’ actual legal costs would be likely to fall significantly short of the $56.5-$104 billion range from S&P;’s report.

But even ignoring those loopholes, and assuming that actual legal costs come in at the high end of S&P;’s estimate, the banks will have gotten away relatively cheaply. If future legal bills total $104 billion, pushing the total cost of crisis-related litigation to about $184 billion, that will still be less than the $207 billion in total profits logged by just six large financial companies from 2010 to mid-2013. The worst-case legal bills for the banks would look even tinier compared to the total cost of the crisis, which researchers at the Dallas Federal Reserve estimate was at least $6 trillion and probably more like $20 trillion.