Similarly, the idea of holding back $5 billion on a passel of mortgages totaling $100 billion seems piddling. Would that small amount truly drive up borrowing costs by 1% to 4%, as lobbyists claimed? The only proof of that offered during a congressional subcommittee meeting last July was the “canvassing” of its members by the American Securitization Forum.
Litigation costs squeeze banks’ bottom lines
Speaking of $100 billion, that’s the chunk of change that JPMorgan Chase & Co (NYSE:JPM), Bank of America Corp (NYSE:BAC), Citigroup Inc (NYSE:C), Wells Fargo & Co (NYSE:WFC), Goldman Sachs Group Inc (NYSE:GS), and Morgan Stanley (NYSE:MS) have paid out in litigation costs since the mortgage meltdown.
Bloomberg notes that JPMorgan Chase & Co (NYSE:JPM) and Bank of America Corp (NYSE:BAC) have shouldered approximately three-quarters of the burden, and it’s well known that Bank of America Corp (NYSE:BAC) has spent over $40 billion regarding toxic mortgages it acquired along with Countrywide. In addition, loan losses prompted both Bank of America Corp (NYSE:BAC) and Citigroup Inc (NYSE:C) to back away from the mortgage business since the financial crisis, thus giving away mortgage-writing income to industry leader Wells Fargo & Co (NYSE:WFC), as well as JPMorgan Chase & Co (NYSE:JPM).
Bad mortgages are bad business, and you’d think banks would welcome rules designed to protect themselves — not to mention investors and taxpayers — from losing money on dicey loans. Yet, they continue to fight against the regulatory tide. Government officials are inviting comment on the new rules until October 30, but I think it’s unlikely the original, more restrictive regulations will make it into the final cut.
Will investors finally tire of seeing bank profits put toward legal expenses, rather than dividends? Shareholders have proven themselves an effective lobby, as activism becomes more common and effects more changes. When stockholders have had enough, perhaps they will be able to do what government regulation has not: force big banks to take steps to protect themselves, their investors, and the financial system from the threat of another crisis.
The article Watered-Down Mortgage Rules Probably Won’t Prevent Another Crisis originally appeared on Fool.com and is written by Amanda Alix.
Fool contributor Amanda Alix has no position in any stocks mentioned. The Motley Fool recommends Bank of America, Goldman Sachs, and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo.
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