In late October, one financial institution was on the path towards racking up nearly $14 billion in penalties. And it's not alone. Another $850 million may soon be tacked onto another bank's negative ledger. For the last few years, the cost of litigation in the wake of the financial crisis has far exceeded the estimates of the cost of asbestos litigation, making risky lending and the other practices that led to the financial crisis of 2008 more toxic financially than even asbestos. And more litigation appears in the works.
A 2005 study by the RAND Corporation estimated the cost of roughly 30 years of asbestos litigation to have reached $70 billion. In comparison, a study by The Economist tallies the cost, to date, of financial litigation in the wake of the financial crisis to reach nearly $100 billion. Although many expect the cost of asbestos litigation to continue to climb over the coming decades, and reach an estimated $200 billion, pending mortgage litigation could outpace that figure in just the next year.
The news of the eye-popping $13.5 billion settlement between the Justice Department and other government entities was followed by the announcement that part of that settlement would be with the Federal Housing Finance Agency for roughly $5 billion alone. Between the news of these developments came word that a jury in Manhattan found Bank of America liable for the conduct of its subsidiary, Countrywide, for misconduct in the waning days of the mortgage frenzy. Late last week, the federal government asked the judge in that case to penalize BofA to the tune of $864 million following that verdict. But even if the judge does penalize the bank in that amount, it would be a drop in the bucket compared to the nearly $50 billion Bank of America alone has paid out over the last few years, mostly for the misconduct of Countrywide Financial and its affiliates, purchased by BofA during the peak of the subprime market. What's more, last year, five of the biggest banks settled for up to $32 billion to resolve potential claims in the so-called "robo-sign" scandal in which low-level bank officials fabricated documents in the course of foreclosure litigation.
It does not look like this is the beginning of the end for such litigation, however. Bank of America is likely to face a new round of litigation, as the Justice Department and several state attorneys general seeem poised to bring new claims against it. Moreover, the nearly $100 billion in judgments, penalties and fees, with nearly $14 billion being obtained just last month, could be the mere tip of the iceberg. The FHFA has roughly 15 more suits pending against other banks, not just JP Morgan, for which they have sought nearly $200 billion in damages. A settlement that halved the claims would still double the payout from mortgage litigation.
In 2009, I wrote an article suggesting that public and private actors could use the courts to help to remedy the worst abuses of the financial crisis by using a "mass torts" model of litigation--one in which sweeping claims are litigated and then resolved through broad and far-reaching settlements. This approach has been used in other traditional "toxic torts" contexts: asbestos litigation for one, but in other settings as well, like defective medical devices and harmful consumer products. The goals of such litigation often vary, but by using a mass torts approach, plaintiffs and defendants alike are typically able to produce meaningful relief to victims and bring about financial peace for defendants, without resorting to unpredictable, costly and time-consuming adjudication by trial of every individual claim.
Apart from the rare trial--with the Bank of America verdict from last month being one of those exceptions--most of the $95 billion in claims that banks are paying out have come in the form of settlements, and the banks are distributing a good portion of these funds to victims of mortgage abuses. Thus, mortgage litigation appears to bear the hallmarks of toxic tort litigation: i.e., broad-ranging settlements that attempt to resolve sweeping claims and speed financial benefits to a large number of beneficiaries.
The major developments last month--the settlements with JP Morgan and the guilty verdict impacting Bank of America--could stiffen the resolve of both government lawyers and private attorneys, and encourage them to take more aggressive action to help mitigate the $9 trillion homeowners have lost in home equity that the Government Accounting Office has identified as a product of the financial crisis. The nearly $100 billion assessed to date is a lot of money; it would appear we have farther to go to offset the range of fallout from the financial crisis. Perhaps these recent victories could encourage more aggressive action by regulators and private actors alike.
It is said that a lie is halfway around the world before the truth gets its boots on. Perhaps the truth is finally gaining ground.