Big Banks: Settlement Fear Losers

NEW YORK ( TheStreet) -- SunTrust ( STI) of Atlanta was loser among major U.S. banks on Wednesday, with shares down nearly 3% to close at $33.64.

The broad indices all ended lower, dragged down in part by Caterpillar ( CAT), which reported an 18% year-over-year drop in third-quarter revenue to $13.423 billion, with earnings-per-share declining 43% to $1.45. Caterpillar lowered its guidance for 2013, saying it expected full-year revenue to be down 17% to $11 billion.

"This year has proven to be difficult, with expected sales and revenues nearly $11 billion lower than last year," Caterpillar CEO Doug Oberhelman said in the company's earnings release. "We expect Resource Industries to be down close to 40 percent for the full year and Power Systems' and Construction Industries' sales to each be down about 5 percent," he said.

"Not only is mining down from 2012, the demand for equipment has been difficult to forecast," Oberhelman said, adding that the company early in 2013 had expected order rates to improve later in the year, "based on strong mine production for many commodities."

Settlements Won't Settle Risk for Big Banks

The KBW Bank Index ( I:BKX) on Wednesday was down 0.7% to 64.68, with all but five of the 24 index components ending with losses. Big banks seeing the largest declines included JPMorgan Chase ( JPM), with shares down 1.6% to $52.75, Bank of America ( BAC), with shares down over 2% to $14.23, and Citigroup ( C), which was down 1.3% to close at $50.10.

By setting aside $9.15 billion during the third quarter for litigation reserves, JPMorgan Chase signaled an eventual huge settlement of with the Department of Justice, Federal Housing Finance Agency other federal regulators and states' attorneys general, over investigations of the company's mortgage lending and loan sales, along with those of Bear Stearns and Washington Mutual, which JPMorgan acquired during 2008. The total figure for that settlement could reach $13 billion, according to media reports.

But the Wall street Journal on Wednesday reported that a group of investors, including BlackRock ( BLK) and Neuberger Berman are seeking "at least $5.75 billion" from JPMorgan Chase, to recover losses on mortgage-backed securities sold to them by the bank and the firms it acquired.

JPMorgan provided comfort to investors by disclosing $23 billion in litigation reserves as of Sept. 30, but the figures being bandied about are growing. According to one recent media report, JPMorgan's coming settlement with the Justice Department could set a "standard" for other banks' settlements. It will also set the stage for a flurry of additional lawsuits from institutional investors.

One of the loudest voices calling for large banks to refuse huge settlements and fight government charges piecemeal in court is Lafferty Capital Markets analyst Richard Bove. In a client note on Wednesday, Bove summed up the risk that will be faced by JPMorgan and other large U.S. banks following the expected settlement:

"This is just the beginning. American banks have built up record cash reserves and capital bases. This money is now up for grabs and the lawyers are going to go after it. The Federal government, states, municipalities, investment firms, and innovative entrepreneurs can now sue banks for whatever ill that they believe may have befallen them due to alleged depredations in the mortgage industry," he wrote.

According to Bove, the banks "do not have the right to sit and hand out investor and depositor money to anyone who chooses to sue them." The analyst also repeated his call for significant shareholder activism: "I continue to believe that if the JPMorgan Chase's Board agrees to a $13 billion settlement with the government it should immediately be removed from its position because it is not protecting shareholders, employees, or depositors in this bank."

SunTrust also took a major hit to is third-quarter earnings, with over $1 billion in mortgage-related items, including large settlements with Fannie Mae, Freddie Mac, the Federal Reserve and the Federal Housing Administration.

But even SunTrust may not be out of the woods yet. "Regulators are currently looking into whether STI harmed borrowers by mishandling applications for mortgage modifications under the Home Affordable Modification Program (2009-2010)," according to Gimme Credit analyst Kathleen Shanley.

In a note to clients on Wednesday, Shanley wrote that "Just ahead of this week's bond offering, STI also disclosed that it is named in three pending class action lawsuits accusing it of acting improperly in the placement of force-placed homeowners' policies. STI is seeking to dismiss the cases, but JPM and Assurant ( AIZ) recently settled similar allegations for $300 million."

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-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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