This past year was full of excitement for JPMorgan Chase (NYSE:JPM), which found itself the subject of numerous legal actions -- as well as gasping for air in the wake of the London Whale trading fiasco. Now that these things are behind it, JPMorgan will be able to get on with the business of banking. Right?
Well, yes and no. The bank will certainly continue with its forward momentum, making money on mortgages, loan underwriting, and wealth management, among other things. Unfortunately, it looks like the bank may be putting more of that income toward legal fees, as a deluge of legal troubles are poised to hit the big bank within the next year, a good deal of which will be carried over from 2012. Also, it appears that the hubbub about its trading boo-boo earlier this year isn't over yet, either.
London Whale fallout will follow JPMorgan into 2013
Though the brouhaha over the trading blunder appeared to have died down, a recent article in the Wall Street Journal shows that this assumption may be a bit hasty. Not only did the issue cost JPMorgan nearly $6 billion, but the scandal also caused legislators to dig in their heels against big banks' insistence on changes to Dodd-Frank regulations.
Apparently, the fact that the well-respected bank could be brought down a peg by trading troubles made even the most laissez-faire-minded lawmakers think twice about loosening the regulatory reins. And so it was that, just as it looked like the big banks may have been making some inroads against regulations that they felt were too restrictive, the Whale washed all such considerations down the drain.
That's a heavy weight to bear, even for the nation's largest bank, and tough on CEO Jamie Dimon -- formerly the darling of Wall Street. Public humiliation aside, the bank is also in line to get its wrists slapped by the Office of the Comptroller of the Currency, the bank's principal regulator. The new head of the OCC, Thomas Curry, isn't amused by such shenanigans and will likely require changes in the bank's value-at-risk model -- something that JPMorgan has already shaken up three times this year. Fines may be assessed farther down the road, as well. Expect more fallout on this matter in the coming months.
Lawsuits: Mortgages, energy, and swaps. Oh, my!
Big banks are getting sued right and left these days, but, since JPMorgan has its fingers in so many pies, it seems to attract more than its fair share.
In the toxic mortgage area, Bank of America (NYSE:BAC) doubtless takes the cake, with its smoldering pile of smelly mortgages originated by Countrywide. JPMorgan has quite a mess of its own, however, and will be seeing more complaints regarding mortgage-backed securities sold back in the day by its own 2008 acquisition, Bear Stearns.
The New York Attorney General's office has sued the bank for poor-quality MBSes sold by Bear before it went belly-up, and was subsequently purchased by the Bank of Dimon. Since this suit was the first filed as a result of the Obama administration's Residential Mortgage-Backed Securities Working Group, more of the same will surely be on the way. More recently , the National Credit Union Administration has sued in regards to lousy securities sold by Bear, as well.
As I've mentioned before, JPMorgan has a sizable mortgage-default problem, and the bank has been forced to set aside record amounts of cash to deal with this issue. Dimon has commented that these costs are expected to rise in the future -- which doesn't bode well for 2013. Plus, the bank is being hounded to repurchase up to $140 billion in soured MBSes. Doubtless, at least some of these requests will be forthcoming in the next 12 months.
JPMorgan has also gotten itself in trouble across the pond, as it joins Deutsche Bank (NYSE:DB), UBS (NYSE:UBS), and Depfa Bank in the walk of shame over interest rate swaps it sold to the city of Milan . Look for more Italian municipalities to file lawsuits regarding similar derivative sales in the near future.
On yet another front, the bank's energy unit is doing battle with the Federal Energy Regulatory Commission, regarding possible funny business in the way JPMorgan won bids in California's energy market. While the bank won its legal argument on several emails it claimed were confidential, FERC's investigation is ongoing, presumably into the new year.
In other news, the big bank joined pals B of A Merrill Lynch, Citigroup (NYSE:C), Morgan Stanley (NYSE:MS), and Goldman Sachs (NYSE:GS) in paying a settlement fee for using taxpayer money to employ lobbyists. Sure, the payments took place between 2006 and 2010, and the fee isn't large. But the way lawsuits are being flung at JPMorgan, I wouldn't be surprised if more claims similar to this crop up in the near future.
This is just a sampling of the legal problems facing the big guy, and more will surely pop up in the months to come. On the positive side, JPMorgan will continue to make money in 2013, no doubt, particularly if the economy keeps improving. But the amount of money it will need to fight its legal battles may make more than a small dent in its balance sheet. There's also the question of just how much the London Whale rumpus dinged the bank's reputation -- and whether or not that will have an effect on business.
In any event, it looks like Mr. Dimon and his bank will spend plenty of time next year -- and, probably beyond -- doing some clean-up and repair work from the fallout of 2012.