Why JPMorgan Is Headed Down the Toilet Today

After a quick spike in early trading, JPMorgan Chase  (NYSE: JPM  ) investors quickly started dumping shares. While all of the big banks are struggling this morning, JPMorgan has just come to an agreement on some old business that came back to bite it in the butt. With economic news not helping the market overall, JPM and its compatriots are in for a long fight in trading today.

Economic uncertainty
Investors hate not knowing what's going to happen. And yet that's part of the risk of participating in the stock market. Lately, overall performance has taken a break as investors try to reconcile conflicting economic data with the Fed's future plans for its stimulus policy. This morning's disappointing ADP jobs report showed a smaller than expected increase in private sector job growth. With only 135,000 jobs added, while expectations had rounded out at 167,000, the labor market has yet again given mixed signals to investors. While hiring is still slow, the recovery cannot gain speed, curbing the Fed's choices on reducing bond repurchases.

But the future is still uncertain, and banks are taking the brunt of the negative impact. But while the change in Fed policy may lead to investors pulling back in the market, slowing the recent big gains for banks, the possibility of higher interest rates should be an exciting long-term prospect for bank investors. Interest rate pressures have cut revenue growth and made it harder for banks to produce returns. We'll just have to wait and see how this plays out.

Down the drain
JPMorgan, much like Bank of America (NYSE: BAC  ) and Citigroup (NYSE: C  ) , is finding itself with new problems associated with old business. While JPM hasn't had to step back into the courtroom like its rivals, it does have to settle some old scores. Because of its sale of derivatives to municipalities back in the day, JPMorgan may be facing up to $1.5 billion in losses. While this pales is comparison to the $8.3 billion case Citi is facing, and the potential $60 billion settlement that could swallow B of A whole, the number is no small change for the bank.

JPMorgan sold derivatives and swaps to the municipality in Jefferson County, Ala., in order to finance a new sewer system back before the credit crisis. County taxpayers were hit hard during the financial crisis when variable interest rates on the debt saw the sewer bill increase and the county bonds were dumped by Wall Street during the credit freeze -- the county eventually had to declare bankruptcy in 2011.

The bank had already agreed to $722 million settlement back in 2009 with the SEC related to its Jefferson County financings, but now the bank has agreed to forgive $842 million in debt owed to it by the county. This move may be detrimental to the bank, but with the majority of its debt forgiven, the county will be closer than ever to exiting bankruptcy.

Just another headline
The news from Jefferson County may not be welcomed by bank investors, but it's just one more example of how old deals can come back and bite a business. And since the total cost of this deal is only a quarter of the London Whale's damage, the banks shouldn't have any problem moving forward, if history proves correct. As a Foolish long-term investor, be happy that this will resolve the issue and the bank can go back on its way.

With big finance firms still trading at deep discounts to their historic norms, investors everywhere are wondering if this is the new normal, or if finance stocks are a screaming buy today. The answer depends on the company, so to help figure out whether JPMorgan is a buy, check out The Motley Fool's premium research report on the company. Click here now for instant access!


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