Legal

Reuters finance reporter Lauren Tara LaCapra has done a great job this week of reading the fine print in quarterly filings by Morgan Stanley and Goldman Sachs. On Monday, she reported that Morgan Stanley's 10Q just happened to mention that the bank had received a warning letter from Gibbs & Bruns. (Unless you have an allergic reaction to the words "mortgage-backed securities," you surely know that Gibbs represents the group of major institutions that forced Bank of America into the negotiations that resulted in BofA's proposed -- and embattled -- $8.5 billion settlement with Countrywide MBS investors.) On Tuesday LaCapra found another nugget of gold in Goldman Sachs's filing: The bank reported $15.8 billion in MBS litigation exposure, up from the $485 million it reported three months ago.

La Capra's stories got me wondering: Do these beefed-up disclosures represent a recognition by the banks that this whole MBS thing may be more serious than they previously believed? Or are they just covering themselves against assertions that they didn't adequately warn about MBS risk?

There's no question that MBS players are under a lot of pressure to disclose more information about the MBS exposure. As I've reported, both the Securities and Exchange Commission and the Public Company Accounting Oversight Board have warned banks and their auditors that they have to do a better job of disclosing their exposure to breach-of-contract buyback claims. The bond insurers' trade group has been making the same noise. As banks gear up for their end-of-the-year SEC filings, which, remember, are audited and certified, they're clearly taking these disclosure warnings seriously.

But they're also clearly facing more MBS litigation. (I told you so. . .) After JPMorgan Chase and Bank of America filed their third-quarter results, Bloomberg reported last month that the tally for bad MBS was up to a whopping $69 billion, with both banks noting a bump in put-back claims on deficient underlying mortgages. Morgan Stanley's Nov. 1 10Q said, "Recently, the level of litigation activity focused on residential mortgage and credit crisis related matters has increased materially in the financial services industry," citing, among other ongoing cases, the Sept. 2 MBS securities fraud suits by the Federal Housing Finance Agency. But aside from mentioning the Gibbs & Bruns letter -- which threatened claims involving 17 trusts with an unpaid principal balance of $6 billion -- Morgan Stanley didn't specify other potential MBS litigation, although it did note that it has agreed to toll the statute of limitations with some prospective claimants "on a case-by-case basis."

Goldman's 10Q is much more detailed. In addition to a plethora of pending mortgage-related cases, the filing says, "A number of other entities (including John Hancock and related parties, HSH Nordbank, Norges Bank Investment Management, American International Group, Inc. (AIG) and IKB Deutsche Industriebank AG) have threatened to assert claims against the firm in connection with various mortgage-related offerings, and the firm has entered into agreements with a number of these entities to toll the relevant statute of limitations." The $15.8 billion in claims Goldman reported in the filing doesn't include potential claims by those entities or potential put-back claims (which Goldman said are not material).

Just for fun, I also took at look at Credit Suisse's third-quarter results release. Credit Suisse, you may recall, has been notoriously reluctant to acknowledge MBS put-back liability. In its SEC 6K, filed Wednesday, the bank owned up to more than $2.3 billion in outstanding reps and warranties claims, up from $473 million in the fourth quarter of 2010. Credit Suisse's filing suggests it's still not taking the reps and warranties claims very seriously; it's taken only a $53 million "provision" on them, up from $29 million in 2010.

(Reporting by Alison Frankel)