Banks: the Litigation Related Invoices Soar

Banks, LitigationsSince the outbreak of the financial crisis, shock waves shake the world of finance and banks should open up more widely their checkbooks to pay the fines imposed on them by regulators. The Boston Consulting Group released a study amounting to $178 billion (143 billion euros) on Tuesday, the cost to US and European banks of the disputes referred to them.

As shown in the study that examined a panel of 18 banks (6 American and 12 European including French BNP Paribas), the amount of fines has continued to swell between 2009 and this year. Thus in 2009, studied financial institutions have paid $3 billion and the note is already 60 billion in the first nine months of 2014.

US banks have paid 65% of total fines

For the US banks, it is from 2011 that costs have soared, with disputes related to “subprime” loans. For these subprime mortgages, in 2012 the bill was heavier on side of the European banks, including the scandals of manipulation of interbank rate (Libor, Euribor), tax evasion laundering business, or violation of embargoes the US as in the case of the fine of 6, 6 billion euros imposed this year to BNP Paribas.

Of the $178 billion charged to banks between 2009 and 2014, 65% were resolved by US banks against 45% by the European institutions. This disproportion is due to particularly active US regulators: almost all (98%) of the $115 billion paid by US banks were paid on demands of their regulator, as were almost half (45%) of the 63 billion paid European banks.

The report, entitled “Global Risks: towards transparent banks”, highlights the growing pressure regulation on the industry, “each region, each legal entity is, or will soon be subject to specific regulation.”

The United States, specialist in record fines for banks

The year 2013 has been the most “successful” in terms of fines, with more than $50 billion paid by banks to US authorities.

The announcement has shaken the banking sector on Monday, July 14. The fine of $7 billion, inflicted to Citigroup by US authorities, has plunged the course of the bank on Wall Street. The penalty, which will allow the group to end an investigation into financial products sold just before the financial crisis of 2008, is part of a long list of heavy financial penalties imposed by the United States to major banks.

In the past three years, these convictions have increased, while the American justice was previously regularly criticized for not being severe enough with the banks in the wake of the financial crisis, considered “too big to jail,” too big to be truly worried about the judicial level.

They have been linked to abusive practices in real estate (subprime foreclosures), but also to bank rate manipulation, embargo violations or to money laundering with the following charges:

1) $25 billion – Wells Fargo, JPMorgan Chase, Citigroup, Bank of America, Ally Financial.

In February 2012, these five banks collectively agreed to pay $25 billion (€18.9 billion) to avoid prosecution for improper foreclosures.

The text, also signed by 49 of the 50 states, is intended to settle the civil side of the scandal on questionable foreclosures that erupted in 2010 and weighed on the US 2012 presidential campaign.

2) $13 billion – JPMorgan Chase

Ex-model student of Wall Street, the largest US bank by assets balance in November 2013, was engaged in disputes related to financial instruments backed by subprime mortgages. The bank agreed to pay the fine including $4 billion to compensate for the individuals.

As part of the agreement, JPMorgan Chase, the largest US bank by assets, in fact admits to regularly misrepresent the state of affairs to investors, issuing very risky home loans that were included in derivative securities that the JPMorgan sold to the investors.

3) $11.6 billion – Bank of America

One of the few large US banks headquartered in New York, Bank of America agreed to pay $11.6 billion in January 2013 in the mortgage refinancing institution Fannie Mae, to whom it had sold toxic mortgages.

The money of the agreement is apportioned so that $3.55 billion were paid in cash to Fannie Mae and $6.75 billion spent on redemption of thirty thousand loans likely to default and cause future losses for Fannie Mae. In addition, $1.3 billion were vested in monitoring these loans.

4) $9.5 billion – Bank of America

Early in 2014, the same bank is convicted of having escaped prosecution by Federal Housing Finance Agency (FHFA), the industry regulator and supervisor refinancing mortgage agencies Fannie Mae and Freddie Mac.

A jury in federal court in Manhattan, New York, decided that Countrywide Financial Corp., a subsidiary of Bank of America, had deceived the two parastatals presenting these assets at their best, while they were is high risk.

5) $8.9 billion – BNP Paribas

After several months of intense negotiations with the US authorities, BNP Paribas had finally surrendered. The French bank agreed in late June before a court in New York to plead guilty to two counts of “falsification of commercial documents” and “collusion”.

BNP Paribas continued facilitating transactions of billions of dollars with Sudan, but also Iran and Cuba, in violation of “International Emergency Economic Powers Act,” US federal law of 1977, which authorizes the President of the United States restrict trade relations with some countries.

6) $8.5 billion – Bank of America

In June 2011, the bank agrees to compensate a group of investors aggrieved by its practice in real estate. The origin of this case goes back to the 2007-2008 financial crisis, caused in particular by those financial products backed by insolvent borrowers, who have become worthless with the collapse of the real estate sector.

7) $7 billion – Citigroup

Citigroup agreed to pay $7 billion for selling investments backed by fragile mortgages that generated billions in losses for those who bought them.

The amount is more than twice the estimates of financial analysts earlier this year, but still far from the $12 billion requested by judicial and financial authorities from the bank during the negotiations.

8) $2.6 billion – Credit Suisse

In May, the institution admits to have helped wealthy Americans hide assets to the tax authorities of their country. Credit Suisse is accused of having advised and assisted some of its wealthy American clients to establish “truncated tax returns” and thereby escape the IRS.

9) $1.92 billion – HSBC

The British bank agreed to pay this amount in December 2012 to avoid prosecution. HSBC, listed in London and Hong Kong, ends a series of investigations by the US Treasury, but also by the Justice Department and federal agencies, as well as by the Attorney General of Manhattan.

The bank was accused of money laundering complicity belonging to drug cartels and other entities with prohibited access to the US financial system.

10) $1.7 billion – JPMorgan Chase

In January, the bank accepts the fine to avoid prosecution for condoning practices with the  swindler Bernard Madoff.

Justice and regulators accuse the largest by assets US bank of not having alerted the authorities early enough on pyramid scam set up by Bernard Madoff who had been sentenced in 2009 to 150 years in prison.

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