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Banking: Litigation could seriously damage banks’ health

The costs of fighting legal battles at Countrywide increased 70% from 2005 to 2006, an early warning sign of the horrors to come. As litigation mounts, banks’ expenditure to fight charges still attracts too little attention. Greater transparency could be one key to reform. Helen Avery reports.


LITIGATION IS A growing preoccupation in the financial industry. In its first-quarter report Goldman Sachs stated that the Commodity Futures Trading Commission was looking into filing against the firm’s trade clearing unit for "aiding and abetting, civil fraud and supervision-related charges". It sounds serious. The possible charges relate to the extent to which the bank was aware that a brokerage operation was using customer accounts in transactions with Goldman Sachs rather than the firm’s own accounts.

Allegations of aiding and abetting fraud are also being made against JPMorgan Chase. A case launched in February alleges that employees at JPMorgan were aware that Bernie Madoff’s investment fund was fraudulent, yet the firm continued to act as his commercial bank and invested client money into Madoff feeder funds.

On top of aiding and abetting in fraud, banks are being sued at every turn for foreclosing on homeowners improperly, for misrepresenting the quality of loans they were making to investors and insurers, and for betting against their clients. And the industry has turned against itself, with monoline insurers suing banks, and banks suing investment banks over CDOs.

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