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US banking results: Goldman Sachs quadruples annual legal spend as others cutback

The major US banks released fourth quarter 2015 results this week, with Goldman Sachs blaming poor profits on legal costs, as other lenders benefited from declining legal spends.

Goldman Sachs blamed legal expenses for its third straight quarter of shrinking profit, as the bank’s legal expenses for the fourth quarter of 2015 amounted to $1.95bn compared with $161m the year before, with the full year figures more than quadrupling to $4.01bn from $754m in 2014.

The jump in legal spend was largely due to a tentative $5.1bn settlement with US authorities agreed last month following an investigation into how Goldman Sachs handled mortgage backed securities. The agreement in principle reduced fourth quarter earnings by $1.5bn on an after-tax basis.

Bank of America also posted increased litigation expenses for the final quarter of 2015, at $353m from $256m the year before, but legal spend dropped across the year. The bank, which settled a mortgage-backed securities probe in 2014 for $17bn, posted a $1.1bn spend on litigation for 2015, compared with $16.4bn the year before, contributing to its best annual profit in nearly a decade.

Morgan Stanley also benefited from a decline in legal expenses. The bank said fourth quarter non-compensation expenses were down to $3.7bn compared with $5.1bn a year ago, when the bank took a $3.1bn hit on litigation costs ‘related to residential mortgage backed securities and credit crisis related matters.’ The lender swung to a profit of $908m for the quarter compared with a loss of $1.6bn the year before.

Meanwhile Citigroup, which posted profits of $3.5bn for the quarter, included legal and related expenses of $411m compared with $2.9bn in the period prior, or $1.5bn compared with $5.8bn for the full year. Similarly JP Morgan Chase also benefited from shrinking legal costs, which fell from $1.1bn to $644m for the final quarter of 2015. Both CitiGroup and JP Morgan were among five banks to sign a collective $5.7bn settlement with the US Department of Justice in May to bring a close to anti-trust investigations. A raft of firms had picked up mandates on the case, including Gibson, Dunn & Crutcher and Clifford Chance.

Latham & Watkins global banking co-chair Christopher Kandel said how law firms were impacted by banks spending less on litigation was a complex query as the amount banks were paying in regulatory fines had to be separated from what they spent on lawyers.

‘It is a common theme that most of the banks are looking to control costs, and of course we are a part of that,’ he added.

For more see: The end of the tunnel – litigation and regulatory challenges in financial services