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Banks prepare for earnings; mortgages cast a pall

Published on NewsOK Modified: January 10, 2013 at 2:13 pm •  Published: January 10, 2013

NEW YORK (AP) — Legal troubles and regulatory scuffles keep piling up for the banking industry, a fact that's sure to drag down results when the banks start reporting fourth-quarter earnings beginning Friday.

Most obvious will be the pall cast by this week's national settlement over foreclosure abuse. Bank of America, Citigroup, JPMorgan Chase, Wells Fargo and six other banks have agreed to pay a combined $8.5 billion to settle the government's accusations that they wrongfully foreclosed on millions of struggling homeowners.

The banks have already said the settlement will crimp their fourth-quarter results. Bank of America expects a hit of $2.5 billion — more than it made in the fourth quarter of 2011, when it earned about $1.6 billion.

Longer term, the settlement is the latest reminder that a legacy of risky mortgage lending, which helped set off the 2008 global financial crisis, is still exacting consequences in the form of quarterly charges, lawsuits and regulatory fines. The financial crisis may no longer be a sharp pain, but its aftermath is a nagging ache.

The foreclosure mess is hardly the only legal or regulatory maelstrom banks are dealing with. In the fourth quarter, the government separately sued Wells Fargo, JPMorgan and Bank of America, among others, over mortgages they or companies they later bought made in the years before the crisis. The banks have disputed the allegations.

Also, Citigroup had to dismiss a high-profile analyst after regulators accused him of breaking disclosure rules about a company he was covering. A British bank, HSBC, settled Justice Department accusations that lax oversight allowed money launderers to shift funds around with impunity.

Some investors are wondering if U.S. banks could become ensnared in a scandal over the manipulation of a key interest rate. Over the summer the British bank Barclays was fined $453 million by U.S. and British regulators for trying to manipulate the rate, which is known as Libor, or the London Interbank Offered Rate.

Both Citigroup and JPMorgan have said in regulatory filings that financial regulators and state attorneys general had asked them for information related to their role in setting the interest rate, which is a global benchmark for many kinds of loans and short-term borrowing. They and Bank of America, along with other banks, are the subject of Libor-related lawsuits filed by pension funds and other investors.

Banks are already operating in a challenging business environment. Low interest rates are crimping what the banks can earn when they make loans. Increased regulation has cut into some of their former sources of profit, like trading for their own account. Feeble economic growth has made many small businesses and individuals nervous about borrowing money.

And even though 2012 was a good year for bank stocks, that was in large part because 2011 was so bad. Financials were the best performing stocks in the Standard & Poor's 500 index in 2012. In 2011, they were the worst.

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