The French bank BNP Paribas is about to be fined $9-10 billion for doing business with Iran, a country with which the U.S. is finding common ground in Iraq. Since 2008, the U.S. and the trial bar have obtained fines and settlements from global banks totaling $88 billion (as of early June.) Now medium sized U.S. banks such as Sun Trust are being zapped with fines — $968 million to settle claims over its mortgage practices. Thanks to the Fed, banking profits have been exceptionally good the last few years, so the fines have just been a cost of doing business. But as other countries seek to emulate the U.S. the problem will become more serious. One must ask the question: has finance become so legally toxic that as with asbestos companies in the 1980s, it is impossible to survive the legal penalties and class-action lawsuits?

Asbestos had been widely used in the construction industry since Roman times; its health hazards were first clearly identified by the British pathologist Dr. W.E. Cooke in 1924. As with tobacco, the gap between risk recognition and regulation was long, and asbestos was widely used in U.S. shipbuilding during World War II, bringing exposure to over 3 million employees.

The first successful U.S. lawsuit against an asbestos company occurred as early as 1933, after a Metropolitan Life study had shown that 29% of workers in a Johns-Manville plant had asbestosis. However it was only after 1980 that asbestos manufacturers’ legal problems became terminal, with the former Johns-Manville becoming the (then) largest bankruptcy in U.S. history in 1982, and more than half the 25 largest former asbestos manufacturers in the U.S. filing for bankruptcy by the early 1990s. Needless to say the tort bar has got in on the act, with eventual asbestos tort liabilities estimated at $275 billion, much of this derived from fraudulent payouts under class action lawsuits in which no individual damage was proved.

Before 2007, it would have been unthinkable to compare major banks with the unfortunate asbestos companies. Credit was supposed to be a uniform social good, to be extended to the less privileged by all means possible, since their lack of access to credit prevented them from receiving the benefits in higher house values and increased consumption that credit could bring. Likewise, asbestos was thought in 1920 to be a very useful substance; it was both fireproof and insulating, while being cheap and easy to work with.

The subprime mortgage crisis of 2007-08 has awakened us to the dangers of credit. Subprime loans, being more expensive than prime loans, lock borrowers into repayment schedules they cannot meet, destroying their modest wealth in the process. House prices that get too far ahead of affordability condemn buyers to years of bloated mortgage payments, and if prices then fall can trap them in houses they cannot sell, preventing them from moving to better their economic position. Home mortgage re-financings encourage reckless consumption, turning modest, affordable mortgages into massive burdens that wreck their borrowers’ future. Credit card debts are marketed heavily to barely credit-worthy borrowers and are then excessively expensive, turning solvent consumers into deadbeats.

Needless to say, the vast expansion of banks’ activities in the last 30 years has led to a vast expansion in their legal liabilities, much of which has not yet surfaced. If “fast trading” leads to a substantial stock market crash, you can bet the losers will sue. Credit default swaps are another sector where obligations are sufficiently unclear that in an adverse climate, lawsuits will proliferate. Even ordinary swaps and options will prove to have been marketed to inappropriate investors when the inappropriate investors turn out to have lost money.

Finally, can anyone doubt that last year’s relaxation of restrictions around selling hedge funds and direct equity investment to the general public will eventually result in a huge mass of lawsuits? Some of the lawsuits will of course relate to scams that should never have been marketed in the first place, but inevitably others will relate to investments sold in a frothy market by over-enthusiastic brokers that end by losing money for widows and orphans who have foolishly plunged their life savings into them. In England, Anglican vicars were the chosen lead plaintiffs for these lawsuits, being a combination of impoverished and innocent; in the United States the suits will probably be led by retired combat veterans.

It’s not quite asbestosis and melanoma, but the charge sheet against the financial sector is pretty substantial, and it affects a much wider universe of people than the relatively small sector of the population that worked closely with asbestos over a long period.

Both the government and the trial lawyers have been much quicker to open up the opportunities presented to them by the banks than were the authorities and shysters of the 1930s. Banks have suffered both Federal and state penalties running into the billions of dollars relating to their activities in the mortgage business, paying out to unlucky homeowners, to unfortunate investors who have lost money, to CDS guarantors who have bet wrong, to mortgage insurers and to the GSE housing agencies that were a major cause of mortgage problems in the first place. They have also been severely penalized in relation to setting LIBOR and other benchmark rates (which would have been thought litigation-proof a decade ago) and to trading with states like Iran with which the State Department has an on-and-off contentious relationship.

It’s not just American banks either; Deutsche Bank told investors last month that they were involved in more than 6,000 lawsuits, of which over 1,000 had liability of over 100,000 euros ($135,000.) Since Germany itself is a pretty un-litigious country which prefers to settle disputes primarily by arbitration, you can bet that the vast majority of Deutsche Bank’s lawsuits relate to its activities in London and New York, a fraction of its overall business.

The transformation of ordinary banking business into toxic activity that damages borrowers and results in lawsuits years after the event has three causes. One is a proliferation of activities that, while profitable to the bank, are essentially rent-seeking as far as the wider economy is concerned. A second is government meddling in markets, with political objectives such as minority home ownership generating legislation forcing banks to lend to borrowers they would not have deemed creditworthy.

The third and most important immediate cause of the lawsuit bonanza is two decades of over-expansionary monetary policy, which have persuaded the public that borrowing excessive amounts of money is a sure road to wealth. The disasters of 2008-09 will have slowed that tendency but not stopped it; the even larger tsunami of funny money generated since then will have exacerbated the tendency, and spread it from housing to other activities.

The government and trial lawyers have been immensely successful in raising a huge pot of money from the banking system. They have been assisted by various shenanigans lifting the normal five year statute of limitations on such suits, which would previously have limited them in time if not in size. Going forward, the distortions of the last five years will show themselves in the next downturn in gigantic losses for banks borrowers and businesses generally. While the pathetic subprime borrowers may be less evident next time around, there will be other sympathetic victims, people who have lost jobs and savings in the various scams currently being perpetrated.

In the next downturn, the banks will themselves be struggling with huge losses from the failure of recent activities. It is very unlikely however that the bloodsuckers of public and private sectors will lessen their activities because their victims are no longer profitable. More likely, they will invent yet more arcane complaints of bank malfeasance, perhaps involving fast trading, derivatives or some other high-tech activity the public doesn’t understand which can be made to look deeply sinister.

The likely result is obvious, and it will involve at least all the major U.S. banks, plus those worldwide banks foolish enough to do substantial business in the United States. With losses from their conventional business plus an endless stream of legal extortions from a wide range of cases involving the full range of their activities, the banks will fold. Not just one or two banks will fold, but the whole system, or at least more than half of it, as in the case of asbestos. Only the smallest houses, too small and struggling to be worth the time of the trial bar, will stagger into an uncertain future from which their larger brethren have disappeared.

This is the true systemic risk in U.S. finance. The regulators, having devoted over 30,000 pages of regulations attempting to prevent the banks from folding, will by their own greed and that of their friends in the trial bar have caused a far bigger collapse than could ever have occurred without Fed and regulatory intervention. Just as from the 1970s onwards it was both socially unacceptable and financially ruinous to have ever manufactured asbestos, so too from 2020 onwards, if not earlier, it will be socially unacceptable and financially ruinous to have ever been a banker.

Asbestos had substitutes, not all of them perfect. It’s not yet clear what our economy will find to substitute for the banking system.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)