Has Relentless Litigation Taught JPMorgan a Lesson?


Sources told Reuters that JPMorgan Chase (NYSE:JPM) Chairman and CEO Jamie Dimon sat down with government officials on Thursday to talk over an $11 billion settlement related to crisis-era mortgage probes. The details of the massive settlement are still up in the air, but the total fine could call for a $7 billion cash penalty and a $4 billion charge for consumers. Dimon is reportedly meeting with officials from the U.S. Department of Justice, the Department of Housing and Urban Development, the Securities and Exchange Commission, and the Attorney General’s Office of New York.

The news comes just two days after the National Credit Union Association — an independent federal agency tasked with oversight of federal credit unions — said that it filed suit against a variety of banks, including JPMorgan, for violations of federal and state antitrust laws as well as the fraudulent sale of securities. JPMorgan was accused of both manipulating interest rates through the London Interbank Offered Rate (Libor) system and of selling bad mortgage-backed securities to corporate credit unions.

And all of this is just icing on the cake, if that cake is a massive stack of layered litigation that has cost JPMorgan $5 billion in legal fees alone in each of the past two years.

To torture the image, if the cake had a decoration, it would be a giant frosting whale.

“The ‘London Whale’ episode not only cost us money — it was extremely embarrassing, opened us up to severe criticism, damaged our reputation and resulted in litigation and investigations that are still ongoing,” Dimon told shareholders in an April letter. “The London Whale was the stupidest and most embarrassing situation I have ever been a part of.”

It’s unclear what the total costs of the London Whale incident will end up being, but JPMorgan has lost as much as $6.2 billion on the synthetic credit portfolio so far alone, and the company disclosed that possible losses associated with its ongoing legal and pending proceedings — for the London Whale fiasco and other events — could be as much as $6.8 billion.

The SEC recently issued a litigation release formally alleging that Javier Martin-Artajo and Julien Grout, two former traders at the bank, fraudulently overvalued investments in order to hide losses in their portfolio — a move that many saw as a precursor to any settlement.

From the statement: “When the portfolio began experiencing mounting losses in early 2012, Martin-Artajo and Grut schemed to deliberately mismark hundreds of positions by maximizing their value instead of marking them at the mid-market prices that would reveal the losses. Their mismarking scheme caused JPMorgan’s reported first quarter income before income tax expense to be overstated by $660 million.”

“But,” Dimon said in his letter, “it is critical that we learn from the experience — otherwise, it truly was nothing but a loss.”

Even after agreeing to a $1 billion settlement with five regulatory agencies, a move that ended four civil investigations into the trading scandal and two into the wrongful billing of credit-card customers, the bank still faces additional criminal probes into the London Whale loss as well as its behavior during an energy trading investigation, sales of mortgage securities in the United States, possible bribery in China, and its role in manipulating the benchmark interest rates known as Libor in the U.K.

Of the total settlement, which was recently made public, $920 million was related to the trading loss and $80 million was tied to improperly billing credit-card customers for identity-theft protection services that the customers did not receive. Despite earlier reports, the deal also required the bank to make a formal admission of wrongdoing.

Bank executives called the Whale settlements “a major step in the firm’s ongoing efforts to put these issues behind it” in a press release announcing the agreement with regulators. “Our Company has learned from its mistakes, and our Board is confident that our management team is fully committed to ensuring they don’t recur,” added JPMorgan director Lee R. Raymond.

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