Long shadow of financial crisis haunts banks

NEW YORK — The hot trend in banking now: Betting which one will be next to get sued.

Major U.S. banks start reporting third-quarter earnings today. And while some of the cold fear of the scandal-filled second quarter has worn off, and revenue is expected to rise for at least two banks, there will still be ample reminders of the long shadow of the financial crisis. More than four years after the crisis imploded, and banks have yet to shake its consequences.

In just the past two weeks, at least three major legal battles over crisis-era accusations have swirled: Bank of America settled accusations that it misled investors when it agreed to buy Merrill Lynch. The New York attorney general sued JPMorgan Chase over the risky mortgage-backed securities once peddled by Bear Stearns, which JPMorgan now owns. The federal government sued Wells Fargo, charging that the bank improperly received millions of dollars’ worth of government insurance payouts for failed mortgage loans. Previously, at the end of August, Citigroup settled accusations that it had misled investors about the depths of its subprime-related dealings.

Bank of America and Citi denied wrongdoing but said they were agreeing to settle because they wanted to move on. JPMorgan and Wells Fargo have said they will contest their pending charges.

Chris Whalen, senior managing director of Tangent Capital Partners in New York, predicted that such lawsuits will continue to haunt the industry.

For JPMorgan, Bank of America and other banks facing legal disputes over their mortgage-backed securities, Whalen wrote, “the proverbial party is just getting interesting.”

There are other problems lingering from the financial crisis as well, and investors aren’t sure whether they’re really dormant or about to detonate.

Reports have swirled that banks will get slapped with sanctions for unintentionally allowing money laundering. Investors are wondering whether more banks will be caught up in the interest rate-fixing scandal that snagged Barclays this summer.

Mortgage-lending banks are still wrestling with investors’ demands that they buy back mortgages that they sold in the run-up to the crisis.

And that’s on top of the usual concerns about the European debt crisis, the stumbling U.S. economy, and all those other worries that keep people from borrowing, spending, trading and otherwise greasing the skids of banking revenue.

On the other hand, maybe the steady drumbeat of bad news means investors will be hard to faze. The April-to-June period brought a host of ugly headlines: JPMorgan announced a surprise trading loss, Barclays admitted to manipulating global interest rates, and Morgan Stanley had its much-criticized handling of Facebook’s stock market debut.

The numbers weren’t good, either: Of the six U.S. mega-banks, only Wells Fargo was able to pull in more revenue than it had the year before.

So maybe by now, bank investors consider legal problems just the new normal. The stock of JPMorgan, for example, is higher than it was when the bank revealed its surprise trading loss in May.

The bank earnings season officially kicks off Friday with reports from JPMorgan and Wells Fargo.

JPMorgan analysts will likely want an update on the fallout from the $6 billion trading loss revealed this spring. The bank has shut down the division that was responsible for the mistake, cleared out managers who were involved and re-examined its risk management practices. Still, The New York Times reported Thursday that federal authorities are building criminal cases related to the loss. Overall, JPMorgan has weathered the trading loss well; analysts polled by FactSet are expecting higher revenue this quarter.

As for Wells Fargo, the fact that it is the country’s biggest mortgage lender is a crown that both hurts and helps. The mortgage unit provides a steady stream of revenue, and low interest rates are fueling a boom of refinance business. Analysts are expecting higher revenue this quarter. But the title also makes the bank a target for lawsuits and public vitriol when people want someone to blame for the mortgage meltdown.