Lawsuits plague financial lender space, sow confusion

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You can almost hear the catchy notes from the musical “Guys and Dolls” as the U.S. banking sector struggles to put its troubled past behind it.

More than four years have elapsed since the bursting of a housing bubble that caused a devastating financial crisis, but its alleged victims and perpetrators—there is overlap between the categories—are still fighting over the spoils.

Federal and state regulators, consumer groups, large investors and government-owned agencies are pursuing multibillion-dollar claims against banks over the mortgage mess.

“I have never seen anything like this in my career,” the veteran lawyer Andrew L. Sandler, chairman and executive partner of Buckley Sandler, told me. “Everybody is going after each other: consumers, investors, regulators. This focus on blame rather than solutions is not going to solve the problem.”

The result: Legal issues are contributing to the disarray in the housing market, weighing down financial groups with huge provisions for potential losses and bamboozling an investor community already fretting about banks’ returns and business models.

Maybe, just maybe, in the next month or so, large lenders will finally settle most state and federal probes into alleged foreclosure improprieties. But even that long-awaited package of concessions and fines, possibly worth some $20 billion, won’t be enough to spell the end of the legal morass.

Lawsuits from the private sector will continue for years. Rules introduced since the turmoil, such as a controversial cap on debit-card fees, are spawning fresh litigation. New watchdogs, such as the Consumer Financial Protection Bureau, are sharpening their legal knives.

A Wall Street executive put it best: “Banks have become the Big Tobacco of the modern era: a large target with big pockets for people to sue.” But with much smaller margins in their core business, I would add.