Banks have been the loudest voice in over-regulation theme song.  They claim that Dodd-Frank et al are squeezing into profits and forcing layoff and hurting economic growth.  The drum beat has grown so it has even affected the Presidential fund raising race.  Governor Mitt Romney has far surpassed President Obama in fund raising on Wall Street.

But a recent review by the WSJ found that banks are placing billions of dollars into their litigation reserves.  Yes, billions not millions.  The WSJ found the number is approaching $29 billion.  Every penny placed into a reserve account is a penny not counted as revenue.  From the start of 2010 to the second quarter of this year, Citi, Bank of America, and JPMorgan Chase have collectively taken nearly $29 billion in charges to build litigation reserves, according to bank regulatory filings. That is equal to more than a third of their combined net income for that same 

What's more, the banks spent a combined $4.5 billion during that time on legal expenses, such as lawyers' fees, that are separate from litigation reserves. And the litigation expense figure doesn't include in some cases reserves created for things like demands that banks repurchase shoddy mortgages. BofA, for example, has nearly $16 billion separately set aside for that 

But even with this large amount set aside, investors have little way of knowing if a bank is prepared for big claims or not. And even if such charges don't hit current results, there often is too little attention paid to the long-term effect such claims have on bank profits. That is largely because companies don't have to show the total amount of their litigation reserves. And they typically play coy when disclosing what they set aside for this purpose in a given quarter.

Because banks are only required to provide information about litigation expenses they take each quarter, and not the actual size of the reserve, investors have no way of knowing if the $29 billion has been sufficient. In other words, the banks could be ill prepared for big, future settlements or they may have been filling up a cookie jar that they will raid at some point in the future.

Given that banks are also loath to discuss their thinking on these reserves, investors are left to wonder how different firms compare with one another. Legal risk, for example, has been a big worry of investors in BofA. Yet its litigation-reserve expense of $10 billion during the two-and-a-half-year period was two-thirds that of JPMorgan.

The issue of litigation risk could grow in significance in coming months given expectations that this fall could see legal or regulatory action against banks over allegations that firms may have manipulated a key interest rate used to determine payment rates for trillions of dollars in loans, securities and derivatives.

Citi, BofA and J.P. Morgan have acknowledged that they are subject to investigations related to the London interbank offered rate, or Libor. In addition, they are subject to private lawsuits related to it. Analysts estimate such lawsuits could cost those firms and other big, international banks anywhere from under $10 billion to nearly $200 billion, collectively.

But a recent review by the WSJ found that Banks are placing billions of dollars into their litigation reserves.  Yes, billions not millions.  The WSJ found the number is approaching $29 B.  Every penny placed into a reserve account is a penny not counted as revenue.  From the start of 2010 to the second quarter of this year, Citi, Bank of America and J.P. Morgan Chase have collectively taken nearly $29 billion in charges to build litigation reserves, according to bank regulatory filings. That is equal to more than a third of their combined net income for that same period.

What's more, the banks spent a combined $4.5 billion during that time on legal expenses, such as lawyers' fees, that are separate from litigation reserves. And the litigation expense figure doesn't include in some cases reserves created for things like demands that banks repurchase shoddy mortgages. BofA, for example, has nearly $16 billion separately set aside for that purpose.

But even with this large amount set aside, investors have little way of knowing if a bank is prepared for big claims or not. And even if such charges don't hit current results, there often is too little attention paid to the long-term effect such claims have on bank profits. That is largely because companies don't have to show the total amount of their litigation reserves. And they typically play coy when disclosing what they set aside for this purpose in a given quarter.

Because banks are only required to provide information about litigation expenses they take each quarter, and not the actual size of the reserve, investors have no way of knowing if the $29 billion has been sufficient. In other words, the banks could be ill prepared for big, future settlements or they may have been filling up a cookie jar that they will raid at some point in the future.

Given that banks are also loath to discuss their thinking on these reserves, investors are left to wonder how different firms compare with one another. Legal risk, for example, has been a big worry of investors in BofA. Yet its litigation-reserve expense of $10 billion during the two-and-a-half-year period was two-thirds that of J.P. Morgan.

The issue of litigation risk could grow in significance in coming months given expectations that this fall could see legal or regulatory action against banks over allegations that firms may have manipulated a key interest rate used to determine payment rates for trillions of dollars in loans, securities and derivatives.

Citi, BofA, and JPMorgan have acknowledged that they are subject to investigations related to the London interbank offered rate, or Libor. In addition, they are subject to private lawsuits related to it. Analysts estimate such lawsuits could cost those firms and other big, international banks anywhere from under $10 billion to nearly $200 billion, collectively.

So is the problem with bank profits due to over regulation or perhaps under regulation?  What I mean to say is that the banks being litigated for among other things, shoddy LIBOR rate setting procedures.  If the regulators had set strict rules around the process, then it is likely that many of these billions would be in profits as opposed to reserves.  As the famous Aamco car repair commercial says, "you can pay me now or pay me later." I don’t think he was considering dollar amounts quite this high.