The fallout from the subprime mortgage crisis continues to plague U.S. banks, according to Standard & Poor's, with the ratings agency estimating billions of dollars in extra litigation fees may hit major lenders.
In the lead-up to the financial crash of 2008, U.S. banks packaged and sold residential mortgage-backed securities -- a type of financial instrument that contained mortgages and home-equity loans of varying risk.
Once homeowners in the U.S. started defaulting on their loans in record numbers in 2007, the market for mortgage backed securities collapsed as it became impossible to tell whether the debt in the security was high- or low-risk, sparking the global financial crisis.
This month, JPMorgan agreed to pay $13 billion to settle charges that it misrepresented the quality of mortgages it sold in these securities. Meanwhile, the legal wrangling over Bank of America's proposed settlement of $8.5 billion is yet to be completed. S&P now believes that more banks could be set to face extra payouts.
"We estimate that the largest banks may need to pay out an additional $55 billion to $105 billion to settle mortgage-related issues," %VIRTUAL-article-sponsoredlinks%Stuart Plesser, a credit analyst at the ratings agency said in a press release late Tuesday.
The banks included in the report are Bank of America (BAC), Citigroup (C), Goldman Sachs (GS), JPMorgan Chase (JPM), Morgan Stanley (MS) and Wells Fargo (WFC). These banks weren't immediately available for comment when contacted by CNBC. Citigroup declined to comment when contacted.
Investors claim that the securities sold have breached "representations and warranties" that had been in place to ensure certain standards and conditions for the financial instruments.
Plesser added that the banks should be able to able to withstand the ramifications of legal issues having paid or set aside more than $45 billion and incurring roughly $50 billion in combined legal expenses.
"We already incorporate heightened legal issues into our ratings, and we currently don't expect legal settlements to result in negative rating actions for U.S. banks," he said, but iterated that it still has a negative rating on Bank of America.
S&P: U.S. Banks Could Face Over $100 Billion in Legal Charges
Swiss bank UBS blames a rogue trader at its London office for a $2.3 billion loss that is Britain's biggest-ever fraud at a bank. Kweku Adoboli, the 32 year old trader, is sentenced to seven years in prison. Britain's financial regulator fines UBS after finding its internal controls were inadequate and allowed Adoboli, a relatively inexperienced trader, to make vast and risky bets.
The case has echoes of Societe Generale trader Jerome Kerviel, who hid €5 billion in losses. Kerviel said SocGen turned a blind eye to his colossal positions in late 2007 and early 2008 as long as they made money for the bank.
Wells Fargo Bank agrees to pay at least $175 million to settle U.S. Department of Justice accusations that it discriminated against qualified African-American and Hispanic borrowers from 2004 through 2009. The department said the bank's discriminatory lending practices resulted in more than 34,000 African-American and Hispanic borrowers in 36 states and the District of Columbia paying higher rates for loans solely because of the color of their skin.
JPMorgan Chase announces a loss of $2 billion from a trade that was meant to protect the bank if the global economy sharply deteriorated. Later, losses from the bad trade swell to nearly $6 billion and shave much more from the company's stock market value. The episode heightens concerns that the biggest banks still pose risks to the U.S. financial system, less than four years after the financial crisis.
Barclays agrees to pay more than $450 million to U.S. and British regulators to settle charges that it attempted to manipulate a global benchmark interest rate known as LIBOR. The rate indirectly affect the costs of hundreds of trillions of dollars in loans that people pay when they get loans to go to college, purchase a car or buy a house. Numerous other banks are under investigation for similar violations.
UBS pays $1.5 billion to settle LIBOR manipulation charges with regulators in the U.S., Britain and Switzerland. The bank says some of its employees tried to rig LIBOR in several currencies.
An independent review finds Kabul Bank spirited some $861 million out of war-torn Afghanistan in a massive fraud based on fake loans to 19 individuals and companies. A bailout of the bank costs the equivalent of 5 percent of Afghanistan's gross domestic product, making it one of world's largest banking failures ever.
HSBC, Europe's largest bank, says it's paying $1.9 billion in penalties to settle a U.S. money laundering probe. The investigation into HSBC focused on the transfer of billions of dollars on behalf of nations such as Iran and the transfer of money from Mexican drug cartels. The bank said its anti-laundering measures were inadequate and said it was "profoundly sorry."