The legal cost problem of American banks

Bank of America reported its earnings today. Their profit for the last quarter was $2.5 billion, up from $340 million during the same period last year. That came on the back of a drop in legal expenses from $1.6 billion to $1.1 billion. Yes, you read that right. One single bank spends more than a billion freaking dollars on just litigation costs every single quarter!

JPMorgan reported its earnings last week and the story behind its legal costs was even worse. They reported their first loss under the current CEO because they incurred $7.2 billion in legal expenses last quarter. They have set aside $20 billion since January 2010 towards legal and regulatory costs!

These numbers are simply ridiculous and indicates the extent of the waste of resources. We are spending billions of dollars every year in litigation because of the banks; the talent and money spent on which could otherwise have been put to productive use.

There are serious problems with the banking industry and its practices. Else, why would these banks need to spend billions of dollars in litigation every year? There is a need for a B-Corp type bank with fundamentally different vision and business model than traditional ones. However, computer programmers using lean startup technique by building incremental features is not going to solve the problem. (The result is a company like Simple, which does nothing more than add a layer on top of the existing model, strengthening it.) You will also need to work regularly with the regulators to solve the problems. The anti-government rhetoric of most people involved in tech will simply not work.

The billions of dollars saved every year by having a sound business model is a great opportunity for a new bank, built from the ground up. The rise of Bitcoin and crypto-currencies is very interesting since it is building a parallel model to the way traditional banks operate (think Clayton Christensen’s theory of disruption, or an analogy similar to MOOCs in education). I admit it is very early in the Bitcoin space to predict anything. Nonetheless, I cannot help but be excited about the potential in terms of the efficiency a banking model built around crypto-currencies could bring!

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