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In wake of JPMorgan settlement, big banks add to defense funds

The lobby of JP Morgan headquarters is photographed through it's front doors in New York May 11, 2012. REUTERS/Eduardo Munoz
The lobby of JP Morgan headquarters is photographed through it's front doors in New York May 11, 2012. REUTERS/Eduardo Munoz

By Emily Flitter

NEW YORK (Reuters) - Several large U.S. banks have set aside extra money to pay for potential legal costs in part because of JPMorgan Chase & Co's massive $13 billion settlement with U.S. authorities over bad mortgages, according to two sources familiar with the situation.

The size of the JPMorgan settlement, which the government called the largest in U.S. history, led many banks to realize that the cost of resolving some of their own legal problems was likely to be higher than they had initially believed, the sources said.

Justice Department officials have said in public statements they want to use the JPMorgan settlement as a template for deals with other banks.

Bank of America, Citigroup, Goldman Sachs and Morgan Stanley all added hundreds of millions of dollars to funds they have set aside to pay for the cost of litigation, including legal fees, fines and settlements. All four banks are facing mortgage-related investigations by federal prosecutors located in different parts of the country.

The increase in such funds impacted the fourth quarter results of the banks published this week, surprising many analysts.

The total amount of the four banks' increases in litigation reserves could not be determined because the banks reported them in different formats. A U.S. Securities and Exchange Commission rule says companies must only reserve funds for losses that are "probable and estimable," but does not require companies to disclose how the reserves match their specific expectations.

Spokesmen at all four banks declined to comment.

The additions to legal reserves show how cases related to practices that sometimes date back to before the financial crisis are likely to continue to cause pain to the U.S. banking industry. U.S. and European regulators fined banks record amounts last year, imposing penalties and settlements of more than $43 billion as authorities work more closely across borders to clean up the financial sector.

The U.S. government's Residential Mortgage Backed Securities Working Group, a network of federal and state prosecutors and investigators set up in 2012, has been poring over records and testimony relating to residential mortgage-backed securities (RMBS). Many of these assets were stuffed with home loans that were badly underwritten and issued in the years leading up to the crisis.

"Where the industry thought they were at the tail end of it there's reason to wonder whether there's a whole new round of broader suits that may be brought," said Joshua Rosner, a managing partner at Graham Fisher & Co, an independent research consultancy.

Goldman Sachs said its net provisions for legal expenses in 2013 amounted to $962 million, up from the $448 million it reserved throughout 2012. Bank of America said it had added $2.3 billion to its reserves during the fourth quarter, up from $1.1 billion in the third quarter. Citi added $809 million in the fourth quarter after adding $677 million in the third quarter.

Morgan Stanley added $1.2 billion in the fourth quarter to its litigation reserves, and specifically cited investigations "related to residential mortgage-backed securities and the credit crisis" as the motivation for doing so.

Citigroup Chief Financial Officer John Gerspach said in a conference call with analysts to discuss quarterly earnings that he expected the bank's legal expenses relating to its "legacy assets" would "remain elevated." Legacy assets include mortgage-backed securities that the bank packaged and sold before the crisis.

"It's driven by the higher level of litigation-related activity throughout the industry," Gerspach said on Thursday, adding that Citi's consideration of the landscape had included "things that you've seen hit the press as far as the industry."

(Additional reporting by Peter Rudegeair in New York and Aruna Viswanatha in Washington; editing by Andrew Hay)

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