The big banks could fork over $52 billion to make good on souring mortgages sold to investors, a government watchdog said.
But the Congressional Oversight Panel also warned that the toll could be far higher – and that as a result the U.S. financial system is still in a “precarious place.”
The panel’s estimate of the losses that could be facing Bank of America , JPMorgan Chase , Wells Fargo and Citigroup is in line with those produced on Wall Street. Indeed, the panel’s approach involves picking some of those reports and averaging out the results.
The oversight panel estimates the four biggest banks will lose $36 billion on loans that were bundled into securities and sold to Fannie Mae and Freddie Mac, the government-backed mortgage investors, and $16 billion on those sold to private investors.
The big four banks have taken losses or reserved for future losses on $21 billion of that sum, meaning they face some $31 billion of possible losses in coming years, the panel said. It notes Wall Street expects these losses to hit earnings but not leave the banks short of capital.
That said, the panel – which was put in place to oversee the Troubled Asset Relief Program, the bank bailout enacted two years ago and now in runoff – warned that there’s much we don’t know about the mortgage mess.
Even as it accepts Wall Street’s assumption that legal action against the banks won’t likely lead to huge losses, it points to one high-profile dispute as an example of the risks facing large firms.
So what to do when facing potentially large but unquantifiable risks? Why, run more stress tests:
As it happens, bank regulators are doing just this, with the Fed having said Friday it would force banks to pass new, self-administered stress tests before they can hope to raise their dividends.
But the oversight panel, formerly run by Harvard’s Elizabeth Warren and now in the hands of departing Sen. Ted Kaufman, D-Del., still sees considerable cause for concern.