JPMorgan Chase & Co. and the biggest U.S. banks face billions of dollars in legal costs related to their role in the financial crisis, threatening their profits and the stock price gains they made in 2010, analysts said.
JPMorgan Chase reported $5.2 billion of legal costs in the first nine months of last year, compared with a gain of $10 million in the same period a year earlier. The costs would rise if the bank reserves for multibillion-dollar lawsuits by Lehman Brothers Holdings Inc. and the trustee liquidating Bernard L. Madoff's firm.
Bank of America Corp. and Citigroup Inc. are also besieged by lawsuits stemming from the credit crisis, brought by plaintiffs ranging from foreclosed-upon homeowners to institutional investors whose mortgage-backed bonds turned out to be money-losers.
"They're under legal attack," said Richard Bove, an analyst at Rochdale Securities in Lutz, Fla. "They're similar to the asbestos or the tobacco industry, and they're going to be repeatedly sued in the next few years."
JPMorgan Chase's third-quarter net profit of $4.4 billion, up 23% from a year earlier, would have been larger if it had not set aside $1.3 billion of pretax income for lawsuits and $1 billion for mortgage repurchases. Banks have not yet reported their results for the fourth quarter.
Litigation "ain't going away," JPMorgan Chase's chief executive, Jamie Dimon, told analysts on an Oct. 13 conference call. "It's becoming a cost of doing business."
JPMorgan Chase, which used the word "litigation" about 50 times in its latest 10-Q filing with the Securities and Exchange Commission, discloses more about lawsuits' effect on results than Citigroup or Wells Fargo & Co., and has been taking larger reserves than some rivals, according to company filings.
Almost nine pages of JPMorgan Chase's third-quarter 10-Q deal with legal issues. They range from home foreclosure investigations by state officials, to shareholder lawsuits against Bear Stearns Cos., which JPMorgan Chase bought in 2008, to suits from nine different Federal Home Loan banks demanding compensation for mortgage-backed securities.
This year, though, the usual fraud and mismanagement suits are dwarfed by the potential liabilities stemming from the collapse of the housing market. Litigation may force banks to pay back about $134 billion for so-called private-label mortgage loans, said Chris Gamaitoni, a bank analyst at Compass Point Research and Trading LLC in Washington. Such loans are considered riskier than mortgage loans issued by Fannie Mae or Freddie Mac.
B of A reported $1.2 billion in litigation costs for the nine months through Sept. 30, excluding fees to outside law firms. It is suing or being sued in 5,696 legal proceedings in federal court, compared with JPMorgan Chase's 3,757 lawsuits, according to data compiled by Bloomberg News.
Cases for which B of A has already reserved some money may wind up costing the bank $400 million to $1.9 billion more than it has set aside, according to its 10-Q. The bank's nine-month litigation cost of $1.2 billion compared with $477 million a year earlier.
"Our litigation-related expenses are cyclical and are not attributable to a single factor," said B of A spokesman Lawrence Grayson.
Citigroup, now dealing with 1,713 federal court proceedings according to Bloomberg data, tries to settle lawsuits, the bank said in a filing. Shannon Bell, a spokeswoman for Citigroup, declined to comment.