Goldman puts legal tab at $3.4 billion

March 1, 2011, 8:15 PM UTC

Add Goldman Sachs to the list of big banks sort of bracing for multibillion-dollar legal setbacks in coming years.

Goldman (GS) said in its annual report filed Tuesday that it believes it could end up facing as much as $3.4 billion in losses in coming years on judicial, regulatory and arbitration cases.

The banks size up their chances

That puts Goldman third among the biggest U.S. banks in terms of the legal losses it deems “reasonably possible” beyond whatever amounts it has already set aside.

JPMorgan Chase (JPM) said Monday it could face $4.5 billion of losses, and Citi (C) put its estimate at $4 billion.

All told, the six biggest banks face $15 billion in possible litigation losses in coming years, according to filings over the past week (see chart, right) – though it is clear from the banks’ comments that they view their probable actual exposure as much lower.

The banks’ estimates reflect an accounting rule that calls for them to disclose possible losses when they believe the risk of loss is “more than slight,” Goldman said in its filing Tuesday. It said the amounts reserved against these estimated losses are “not significant as compared to the upper end of the range of reasonably possible loss,” suggesting Lloyd Blankfein isn’t exactly quaking in his cordovans.

Even so, none of the banks listed any cases as exposing them to “reasonably possible” losses in their annual reports a year ago.

Goldman said Tuesday that its estimates of possible losses are based on damages claimed, the amount of securities it sold or the net value of securities that a party seeks to have it repurchase. It added that in many cases it is unable to make any estimates because it is too early in the process to do so and various aspects of the case are uncertain.

Goldman, like JPMorgan and most of the other big banks, didn’t say which cases it has assigned to the “reasonably possible loss” category. But Morgan Stanley, the bank whose filing assigns it the slimmest exposure to potential losses, did.

Its latest annual report notes two cases, both filed in 2009 and tied to swap agreements governing the bubble-era risk debt investments known as collateralized debt obligations, or CDOs.

Morgan Stanley said it believes it is reasonably possible it could lose $245 million in a dispute with Citi over a CDO known as Capmark VI, and $273 million in a suit over the Tourmaline CDO I in which Barclays (BCS) is the holder of the senior, controlling class of notes.

That sums to $518 million – less than half the putative exposure of any of the other banking giants. It’s not often you see a bank act more forthrightly than is called for in the letter of the regulations, but give Morgan Stanley credit here.

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