JPM Settlement Means Banks May Need to Increase Litigation Reserves

JPMorgan Chase’s $4 billion settlement with the Federal Housing Finance Agency reached late last week “sets a relatively high bar” for the 13 other banks still facing litigation from the federal agency, according to Fitch Ratings, which suggested Tuesday that some of the banks may need to increase their litigation reserves before settling.

The $4 billion is about 12 percent of the original face value of the private-label mortgage-backed securities for whichFHFA sought damages. The securities at the center of FHFA’s complaint totaled $33 billion.

In comparison, UBS settled with FHFA in July for 14 percent of the original face value of the MBS in its lawsuit.

“In our view, these amounts are substantial, particularly given the level of to-date losses on the underlying PLS[private-label securities],” Fitch stated Tuesday.

“This reflects the more aggressive stance taken by the federal government in resolving litigation against the banks involving pre-crisis matters,” Fitch added.

When UBS settled in July, Fitch predicted the size of the settlement would make it “more likely that banks with larger exposures may decide to fight the charges in court.”

Of the banks still in litigation, Bank of America faces the greatest exposure with about $57 billion in original face value of securities under scrutiny, according to Fitch. The securities in question were issued by Countrywide and Merrill Lynch.

A Bank of America settlement is likely to land between $5 billion and $8 billion, Fitch says. However, the ratings agency suggests a settlement of this size is no threat to the bank’s ratings.

JPMorgan is also not likely to suffer as a result of its settlement as the bank held about $23 billion in litigation reserves as of the end of the third quarter, according to Fitch.

While the two FHFA settlements thus far “may pave the way for more deals,” Fitch suggests some banks “may need to increase the size of their litigation reserves to reflect the comparative amounts of recent settlements.”


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