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Report: Wall Street may have to pay $50B in mortgage penalties

Wall Street firms may be ready to pay nearly $50 billion to end federal probes into their role in the mortgage crisis. Bank executives, under pressure from their boards of directors, are using JPMorgan Chase’s $13 billion settlement as a yardstick to determine how much they may have to pay to get past the deluge of federal lawsuits over the financial crisis, according to a report in Friday's New York Times.

According to the article, consumers could see $15 billion in relief from the settlements via direct cash payments and smaller loan payments. The Times notes: “A payment of $50 billion, made up of a string of separate deals, would amount to roughly half the total annual profit of large American banks in 2012.” This figure does not include the amount JPMorgan Chase agreed to in November.

 The Times' report is based on analysis prepared for one of the largest banks. According to the analysis, Bank of America could wind up paying a total of nearly $17 billion: $11.7 billion in penalties and $5 billion in homeowner relief. Goldman Sachs total payment is estimated at roughly $3.4 billion; Morgan Stanley’s would be about $3 billion; and the Royal Bank of Scotland could face a total of close to $10 billion.

Both the government and financial firms have a lot of motivation to reach settlements quickly. The White House and regulators continue to feel heat from a public still outraged over the slow pace of investigations and failure to prosecute senior bank executives linked to the financial crisis. This anger has only increased as bank profits have rebounded. Meanwhile, lingering uncertainty about the size and scope of government actions is worrying executives and investors.

But a bill pending in the Senate could up the size of any future settlements. Sen. Elizabeth Warren, D.- Mass., and Sen. Tom Coburn, R.-Okla., introduced a bill earlier this week that would require the government to disclose how the dollar value of these settlements are categorized for tax purposes and if  they can be offset with credits for good conduct.

The senators say they are concerned about the difference between the amount the government says these settlements are worth and how much the banks actually wind up paying. This issue was brought into the public eye following the JPMorgan settlement when it was revealed that much of it was tax-deductible, allowing the bank to effectively pay billions of dollars less than $13 billion.

Other bills pending in the House and Senate would eliminate the deductibility of these settlements. Lawmakers of both parties have also expressed concern over the fact that mortgage companies can shrink the size of a settlement by taking credit for borrower assistance that they may have undertaken anyway.

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