Survivor Guilt: An Assessment of Financial Crisis Lawsuits

What banks have paid the piper from securities fraud lawsuits following the financial crisis?

So far, the biggest losers have been Bank of America Corp. and Wells Fargo & Co. They represent more than half of the $4.4 billion paid in subprime and credit crisis-related settlements, according to Kevin LaCroix, an attorney who writes an extremely well sourced and exhaustive blog on directors and officers (D&O) liability insurance.

But what may be interesting about that fact is not so much that two banking giants have paid the biggest settlements, but that the settlements suggest surviving banks are paying more than the entities that collapsed, notes LaCroix.

Bank of America and Wells Fargo both had bigger settlements than say, Lehman Brothers, whose former executives and underwriters have settled for $507 million. Washington Mutual Inc. became the biggest bank failure in U.S. history when it collapsed into never-never land. The WaMu settlement with investors was $208.5 million, half owed by the directors and officers of the bank but paid by D&O insurance. The other half was owed by the company’s underwriter and auditor, amounting to three separate settlements, according to LaCroix.

Bank of America survived, but paid far more for it. It gobbled up a couple of losers in acquisitions: subprime mortgage aficionado Countrywide Financial and investment bank Merrill Lynch & Co., which was heading toward absolute demise. Settlements stemming from the actions of those two failed entities have amounted to $1.56 billion. Countrywide Financial amounted to the biggest chunk, $624 million in 2010, making it one of the biggest securities fraud settlements ever, according to Stanford University’s Securities Class Action Clearinghouse. The case pitted New York state pension funds and others against the bank for making misleading statements about the quality of its loan portfolio. Bank of America paid $600 million of the Countrywide settlement and Countrywide’s audit firm, KPMG, paid $24 million.

Wells Fargo, another survivor, gets the credit for an even bigger settlement: $627 million in August of last year for the Wachovia Preferred Securities action—$37 million of it paid by, again, KPMG. Wells Fargo bought Wachovia in December 2008 after Wachovia had previously acquired Golden West Financial Corp. and its notorious “pick-a-payment” loans, where the borrowers got to pick how much to pay each month. The loans still drag on Wells Fargo’s portfolio to this day. Wells Fargo’s settlements related to the crisis have totaled $827 million so far.

Of course, there are a lot of complicated factors that go into settlement amounts that have nothing to do with simple guilt. A failed bank like WaMu has insurance proceeds and the personal assets of executives and directors on the table, but that’s about it. A surviving megabank such as Wells Fargo has a lot more assets for plaintiffs to fight over.

Only about 40 cases have settled and 76 dismissed out of about 230 that have been filed relating to the credit and subprime fallout, according to LaCroix.

The years ahead will provide an opportunity to see how much survivors will have to pay for the financial crisis.