Banks Treat Litigation Expenses As Closely Guarded Secrets

Anyone who pays any sort of attention to the financial industry recently has seen headlines regarding an array of lawsuits brought by consumers, shareholders and even government officials regarding the banks' mortgage practices prior to the recent financial crisis. These lawsuits have resulted in substantial settlements, most notably, JPMorgan Chase's $13 billion settlement over its role in handling mortgage securities.

Despite the massive settlements, there has been little word from the banks about how much, if any, money they have left to continue paying for their misdeeds. In fact, some experts and financial analysts note with alarm how strange it is that big banks, which are forced to routinely reveal all kinds of detailed financial information, have not been forced to tell shareholders how much money they have put aside in a litigation reserve.

The concerns regarding banks' litigation reserves began to grow more serious after JPMorgan announced its $13 billion settlement with the Justice Department late last year. At the time the unprecedented amount shocked many in the industry. Now, it seems likely that other banks, including Citi, Bank of America, Wells Fargo and many, many others, will soon be ready to announce similarly large settlements with government regulators and consumers.

The question on many people's minds is whether the banks actually have enough money put aside to pay what could be massive litigation costs. As part of the recent financial reform, banks have been required to reveal how much money they have put aside to cover a variety of unexpected events, an indication of their overall safety and financial health. Rules were also passed requiring banks to declare their exposure to risky investments, including European debt, given that the information was of interest to analysts and stockholders.

Despite the many revelations banks are required to make, their litigation reserve has not yet been made one of them. Though the SEC has hinted that the banking industry should increase the transparency surrounding litigation expenses and savings, there has been no actual requirement that the banks throw open their books.

The banks claim that to do so would harm their efforts to negotiate settlements. They say that by revealing how much money they decided to put aside it might encourage plaintiffs to demand larger amounts of money. However, JPMorgan serves as proof that this is not necessarily the case. Only months before announcing its massive settlement with the Department of Justice, JPMorgan let slip that its litigation reserve fund was around $23 billion. Despite the revelation, the settlement that was eventually reached stayed well below what they could have afforded to pay.

Some banks appear willing to lower the veil of secrecy surrounding litigation expenses. Deutsche Bank and Credit Suisse have both disclosed the size of their litigation reserves, yet have not been joined by any other large American banks. The hope is that regulators and shareholders push the companies to reveal the important information so investors and account holders have the chance to fairly size up the health of the banks with which they choose to do business.


Banks Keep Their Mortgage Litigation Reserves a Secret, by Peter Eavis, published at on January 16, 2014.

In Wake of JPMorgan Settlement, Big Banks Add to Defense Funds, by Emily Flitter, published at on January 17, 2014.

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