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May 26, 2017

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Banks in the US push back as financial-crisis lawsuits pile up

By Aruna Viswanatha and Rick Rothacker--As U.S. authorities seek to make Wall Street pay for its role in triggering the financial crisis more than four years ago, banks are starting to fight back, frustrated that they are being asked to pay more than once for the same conduct.

The result may be that federal and state authorities trying to extract penalties from the banks are forced to go through lengthy courtroom battles, instead of getting hundreds of millions of dollars through relatively quick settlements.

In the past two weeks, two of the biggest banks were hit with separate mortgage-related lawsuits.

One from the U.S. Attorney's office in Manhattan accused Wells Fargo of misleading the government in a "longstanding and reckless" pattern of certifying the quality of questionable home loans and failing to report problems on others.

It said the deception forced the government to pay out hundreds of millions of dollars in insurance claims. Authorities are seeking hundreds of millions of dollars in damages.

Instead of quickly settling the charges, as has happened in most financial-crisis cases, Wells Fargo is contesting the allegations.

Part of its defense will be that the US$25 billion federal-state mortgage settlement reached earlier this year with top banks already cleared out some of this liability, Wells Fargo Chief Financial Officer Tim Sloan said in an interview on Friday.

"There was a lot of disappointment from our perspective in terms of how it was handled, and in particular we were very disappointed in some of the sensational allegations that were made," Sloan said, adding that the bank strongly denies the charges. The earlier settlement covered a certification that Wells says is partly at issue in the new complaint.

In the other case, New York State Attorney General Eric T. Schneiderman last week filed a civil suit against JPMorgan for alleged fraud at Bear Stearns, which JPMorgan bought at the government's request in 2008.

JPMorgan is also fighting back against those charges. Chief Executive Jamie Dimon lashed out this week in Washington at a public event, saying his bank has already paid its price. It took on up to US$10 billion in losses related to Bear Stearns for doing the Federal Reserve "a favor."

Rita Glavin, a former Justice Department official who is a partner at the law firm Seward & Kissel, said banks may be reaching a point where they don't see the logic in settling cases because it's not allowing them to move past the liability.

"You may be seeing them saying, we're going to draw a line in the sand, and we're not simply going to lay down and get rolled over," Glavin said.

The strategy does come with some danger of new information being disclosed that private litigants can use in their own lawsuits against the banks.

But the civil cases also indicate the banks will likely face no criminal charges for the same conduct, potentially giving the banks less reason to immediately resolve them.

"If the banks have come to the determination that the worst that is going to happen is this civil case, then there is less of a downside for going forward," said Neil Barofsky, former inspector general of the TARP bailout who now teaches at New York University School of Law.

The Justice Department declined to comment. James Freedland, a spokesman for the New York Attorney General's office, said about the JPMorgan case: "It would be the ultimate legal loophole if accountability for billions of dollars worth of fraud upon taxpayers and investors could simply disappear into the ether because ownership of a company changed hands."

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