With Bank of America Corp.’s $16.65 billion settlement announcement Thursday over the marketing and sale of subpar residential mortgage-backed securities, prosecutors have closed out the largest remaining government enforcement actions stemming from the financial crisis. The tailing off of the government’s actions promises to affect a swatch of top-tier Wall Street firms, where the investigations and litigation have generated enormous revenues for the past two years.
But five lawyers at the banks’ primary outside counsel, speaking on condition they not be named, say that the pipeline of work continues to be full, as governments worldwide take aim at the same banks in foreign exchange rate-setting and Office of Foreign Assets Control investigations.
Now cleared from the government’s docket are not just BofA but also JPMorgan Chase & Co., which paid $13 billion in the first such megasettlement in November.
“These are the huge ones, the whales,” says one senior bank lawyer. “There are some not insubstantial fish remaining, but just based on volume alone, it’s conceivable that there’s nothing nearly as huge left.”
Citigroup, which paid $7 billion to resolve its RMBS liability in June, had a substantially smaller market share of the securities than some of the banks that haven’t yet settled.
Unlike previous settlements, BofA declined to identify its outside counsel on the settlement announced Thursday. But two lawyers knowledgeable on the matter said that Wachtell, Lipton, Rosen & Katz’s Meyer Koplow advised on the structure of the eventual deal. He could not be reached for comment at press time. Skadden, Arps, Slate, Meagher & Flom and Williams & Connolly also provided legal counsel to BofA.
As the government clears its docket of RMBS cases, firms will ultimately see some drop-off in work, say several lawyers. The most likely to be affected besides Wachtell and Skadden are Sullivan & Cromwell, which has handled a significant part of the RMBS docket for JP Morgan Chase & Co., Goldman Sachs, Barclays, Nomura, UBS, First Horizon and a couple other banks; Davis Polk & Wardwell, which has advised Morgan Stanley on the same; Paul, Weiss, Rifkind, Wharton & Garrison, which handled Citigroup Inc.’s $7 billion settlement and related litigation; Cravath, Swaine & Moore for Credit Suisse; and Simpson Thacher & Bartlett, which advises Deutsche Bank, UBS and RBS, among others. (Skadden also represented RBS, UBS and Societe Generale for RMBS matters.)
A score of other firms have been handling some of the state and private RMBS cases, and those are also expected to wind down in the next year.
Wachtell has represented BofA in a variety of matters related to the financial crisis. Back in the dark days of September 2008, the firm famously advised the bank on the shotgun $50 billion all-stock acquisition of Merrill Lynch. Wachtell soon found itself in the crosshairs over the Merrill bonuses, as did other firms like Cleary Gottlieb Steen & Hamilton and Shearman & Sterling. BoA, dealing with an enraged Congress, waived its attorney-client privilege and turned over some of its internal memos on the matter.
Ultimately, BoA has stayed loyal to Wachtell, tapping the firm to advise on its acquisition of First Republic Bank in late 2009, with Ed Herlihy counseling BoA’s board of its selection of a new CEO late that same year. Koplow handled BofA’s part in the $25 billion mortgage settlement with state attorneys general in February 2012, as sister publication the Blog of Legal Times reported.
Even with Thursday’s record agreement, there’s still a major chunk of bank settlements to do. According to a second senior bank lawyer, remaining banks believed to be next in line with the largest RMBS exposure now include Goldman Sachs, Credit Suisse and Morgan Stanley. The three banks’ combined federal and state liability, according to an analysis by The American Lawyer published in May, totals about $10 billion, though many lawyers say they now expect that number to be higher. The sum includes potential penalties under both the Financial Institutions Reform, Recovery and Enforcement Act and state laws, as well as the settlement of outstanding claims by the Federal Housing Finance Agency, the Federal Deposit Insurance Corporation and the National Credit Union Administration.
FHFA still has active claims against four of the original 17 bank defendants. Goldman and HSBC, currently set for trial on Sept. 29 in the FHFA litigation, are likely to be facing the most pressure to settle, say lawyers knowledgeable about the cases; RBS, the bank facing the largest FHFA damages claim, and Nomura, the smallest in liability, do not yet have a trial date.
By the time the U.S. Department of Justice’s RMBS Task Force is finished, the tab stemming from the soured RMBS is likely to approach $100 billion, according to lawyers who have studied the existing settlements and banks’ RMBS issuance prefinancial crisis.
In other bank litigation, lawyers at the elite firms say they are experiencing no slowdown—at least, not yet. The end of the government’s RMBS cases has been somewhat mitigated, they say, by the private RMBS litigation now approaching a critical end stage, including investor suits and “putback” or “repurchase” litigation. Those suits are not affected by the government’s enforcement settlements, but involve the same securities. A handful of the larger cases are expected to go to trial in 2015.
“Certainly the rate of new stuff is slowing down as the statutes of limitation run out,” says another partner at a large firm that also handles bank litigation. “But a lot of the private litigation is just now coming to fruition.”
New global investigations are also picking up speed. The biggest, these lawyers say, are the global probes of the major banks’ actions in setting benchmark foreign exchange rates. One senior bank lawyer says that “scores” of his firm’s lawyers are fielding administrative subpoenas and other requests from regulators in a number of countries right now. “Sooner or later, the whole bank pipeline will end, but right now it’s going strong,” he says.
Meanwhile, for the banks that have not yet closed out their government RMBS liability, the price of settlement appears to be going up, say lawyers who have parsed the existing settlements. Lawyers who have studied the government enforcement cases say that the BofA settlement hewed closely to the template created by Sullivan & Cromwell and the government in striking a $13 billion settlement last year for JP Morgan—except that the amounts were higher in each category.
Where JPMorgan’s settlement included $4 billion to settle litigation by the Federal Housing Finance Agency, BofA ‘s settlement does not include a FHFA payout. That’s because it already paid FHFA $11.6 billion in January 2013 to settle those allegations. BofA’s total cost, including that FHFA settlement, is $28.25 billion, fully two-and-a-half times the JPMorgan settlement. For BofA, the two payouts total about 100 percent of the value of the claimed losses on the securities in question, lawyers who have analyzed the settlements say.
Unlike JPMorgan or Citigroup, BofA is also agreeing to a $490 million payment for homeowner tax relief.
Among the new round of RMBS cases are a flurry of lawsuits filed by Bernstein Litowitz Berger & Grossmann in June against some of the top banks. Bernstein Litowitz filed the six cases in New York Supreme Court in Manhattan. The trustees—The Bank of New York Mellon Corp, Citibank NA, Deutsche Bank AG, HSBC Holdings plc, Wells Fargo & Co. and U.S. Bank National Association—are accused of breaching their fiduciary duties to investors by “knowing that the pools of loans backing the trusts were filled with defective mortgage loans” and “unreasonably refusing to take any action.”
All told, they involve more than 2,200 RMBS trusts—with combined original principal balances of more than $2 trillion—that purportedly lost a combined $250 billion in value. The complaints are styled as derivative actions, with the investors suing on behalf of the individual trusts themselves. While many older lawsuits demanding that the banks repurchase soured RMBS were either tossed or settled, including suits against BofA, some have survived motions to dismiss, like this one in federal court in Connecticut in April.
Senior reporter Brian Baxter contributed to this story.