Sue The Bank, The Depositors Will Pay
Edgar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It's bad enough Americans are getting squeezed from inflation and meager wages, now they have to worry about government civil lawsuits. Every lawsuit eventually trickles down to us, depositors! Banks unable to generate cash elsewhere, are forced to nickel and dime their customers. Why do you think free checking is going away? Lawsuits!
U.S. Attorney from Southern District of New York brought a fresh $1 billion lawsuit against Bank of America (NYSE: BAC), alleging that the loans sold to Fannie Mae and Freddie Mac were fraudulent. Since Bank of America acquired Countrywide Financial back in 2008, they're liable for the can of worms that never seem to close. It is still uncertain whether these reckless mortgage practices have continued even after the acquisition by Bank of America. It seems to me that as the wave of foreclosures and bad debt write-offs have decreased in the last year, we are trying to nit pick and find new cases to sue banks over before the sub-prime mess turns into an ancient history.
Wells Fargo (NYSE: WFC) is fighting its own arbitration battles in Atlanta for overdraft fees. The bank put its depositors through a litigation process that lasted several years and yielded nearly a million documents, before asserting its right to force its customers to arbitrate their dispute. The U.S. Appeals Court in Atlanta denied the bank's motion to dismiss its class action lawsuit. However, the conservative bank shrugged off these expenses as it recorded a 22% higher net income last quarter from a year before and even got a cash injection from Warren Buffett. It saw an increase of 6% in its core deposits and increased its Small Business lending to $1.24 billion closing over 3,000 SBA loans.
A similar lawsuit was lost by JP Morgan Chase & Co. (NYSE: JPM) in February where the bank had to fork over $110 million to resolve the overdraft fee complaints in a preliminary hearing. This was insignificant to a company that beat last year's earnings results by 48% and rewarded its investors with a 13.05% EPS growth rate. JP Morgan's reputation has been very grim this year as Ima Drew stepped down with her $32 million check. Investors were outraged over the Chief Investment Officer's lofty severance package when the bank took a $2.3 billion loss under her leadership. Additionally, last month a commodities trader Daragh Nott was fired for mis-pricing 90 erroneous aluminum trades, which resulted in another lawsuit against the bank that later ruled in JPM's favor.
What does this mean for us? Think about it, one out of four individuals have a checking account with Bank of America. The $410 million in lawsuit awards paid out by Bank of America came from the millions of $8.95s that the bank charged to its customers who fell short in their checking account minimum required balance, or the fact that a depositor approached a teller instead of an ATM machine. Six months ago I could transfer money in and out of my Bank of America account to external accounts free of charge. Now they charge $3.00 for a 3 day delivery or more if you want the money to be available faster. And what about the 3-5 business day holds they place when a check is over $2,000? How do I know these mega institutions don't pool my money with others during those 5 days and play the commercial paper in an interim? And who can blame them if they do?
It doesn't take a rocket scientist to figure out why banks charge these astronomical overdraft fees. Angry customers sue them, in return they retaliate against all depositors to pay out those lawsuits. It's a vicious cycle that rewards the ones who are not silent from the ones who are.
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