At the beginning of October, New York Attorney General Eric Schneiderman sued JPMorgan Chase (NYSE:JPM), alleging that the bank defrauded and misled investors. Schneiderman accuses JPMorgan of not reviewing mortgage-backed securities with due diligence before selling them, which resulted in a $22.5 billion loss for investors during the financial crisis.
JPMorgan was just the first of up to 12 banks that could face litigation related to the crisis. Wells Fargo (NYSE:WFC) has also been targeted with lawsuits related to mortgage-backed securities. Millions, if not billions, of dollars in pending litigation is enough to warn shareholders about tangible risks to the company. However, shares of JPMorgan have actually climbed since it was sued, while Wells Fargo has only wobbled. According to Reuters, JPMorgan was even hit with an $18 million penalty when it breached duties of care to a trust.
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JPMorgan posted $5 billion in net income after booking a $5.8 billion hit on losses tied to the London Whale trade, took a 20 percent blow to share value, and is still close to fully recovering. Wells Fargo accounted for 33 percent of all U.S. mortgages over the last six months. The institutions appear indomitable.
However, likely lawsuit targets Bank of America (NYSE:BAC) and Citigroup (NYSE:C) could be more vulnerable to litigation. Bank of America is dealing with a $2.43 billion shareholder settlement related to its acquisition of Merrill Lynch that could wipe out as much as a quarter of profit. Legal expenses were attributed to a projected 28 cent per share loss in third-quarter earnings.
Citigroup is settling with Morgan Stanley (NYSE:MS) over their $13.5 billion joint venture. Citigroup came out as the loser in the arangement, taking a $2.9 billion non-cash charge against earnings in the third quarter, leaving the bank worse for the wear.
“We do expect this to be a matter of very significant liability, and there are others to come that will also reflect the same quantum of damages. We’re looking at tens of billions of dollars, not just by one institution, but by quite a few,” said Schneiderman in an interview with Bloomberg Television.
The litigation will add pressure to banks already struggling to recover from the financial crisis a few years ago. Despite sometimes dubious behavior, financial institutions will remain at the heart of overall economic recovery.