Back in October of 2010, when we first exposed Bank of America as massively underreserved for putback, Rep and Warrant and various other forms of litigation, we predicted that once the precedent is set for ever escalating litigation against transgressions banks committed in the Old Normal (the biggest of which was the worst M&A deal of all time: BofA buying Countrywide and with it hundreds of billions in contingent liabilities), very soon banks would be swamped with a tsunami of litigation. And after all, it's only "fair" - the banking industry would not exist if its wasn't for the Fed and government's bailout and backstop of tens of trillions in liabilities at the peak. Now it's time for some "wealth redistribution" - only instead of said government-funded wealth tricking down to the common man, the only social group set to benefit are America's lawyers. Fast forward two years to October 2012, and what we predicted is precisely what has happened. As the chart below shows various "environment charges" aka charges related to mortgage put-backs, legal and foreclosure related issues, have soared to a record 16% of pre-provision earnings. As Goldman calculates, this is reducing EPS and returns by an average 17%! Where it this "profit" going? Mostly to various class cation suit organizing law firms and to pay for $800/hour legal retainers.
This is only the beginning: as more legal successes against banks pile up and as the banking industry's status as the "Old Normal's golden goose" unwinds, increasingly replaced by a stealth regulated utility, expect ever more litigation to be launched as litigation and corporate lawyers, once best of friends and always on the same side of the table as their banker friends, are now positioned as adversaries, perfectly happy to burn the same bridges that 5 years ago made the banker-lawyer cabal the strongest in the world.
And on to another artifact of the New Normal - one in which bankers and lawyers, once the best of friends, are becoming the fiercest of enemies.