JPMorgan Earnings Collapse Under Regulatory Pressure

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JPMorgan Chase & Co. (NYSE:JPM) jumped about 1 percent in premarket trading on Friday after reporting its third-quarter financial results. The firm, America’s largest bank by assets, reported an unexpected net loss of 17 cents per share for the quarter, largely the result of enormous legal expenses. Analysts were expecting a profit of about $1.19 per share, which compares against year-ago earnings of $1.40 per share.

“While we had strong underlying performance across the businesses, unfortunately, the quarter was marred by large legal expense,” Chairman and CEO Jamie Dimon said in the report. “We continuously evaluate our legal reserves, but in this highly charged and unpredictable environment, with escalating demands and penalties from multiple government agencies, we thought it was prudent to significantly strengthen them. While we expect our litigation costs should abate and normalize over time, they may continue to be volatile over the next several quarters.”

JPMorgan reported a pretax expense of $9.15 billion in the third quarter, or $7.2 billion after tax, for corporate legal expenses.

Regulators have relentlessly pursued JPMorgan and other major financial institutions like Bank of America (NYSE:BAC) in the wake of the late-2000s financial crisis. If U.S. Attorney General Eric Holder is a shark, then he’s circling JPMorgan and there’s blood in the water. Most recently, the government attack dog has threatened to sue the bank, claiming that it knowingly sold bad mortgage-backed securities to investors.

The Financial Times reported earlier in September that regulators are seeking as much as $11 billion in total from the bank for this and related alleged violations of securities laws, such as a $6 billion penalty sought by the Federal Housing Finance Agency.

Dimon appears eager to make nice with regulators but also disagrees with regulators about how much responsibility his bank bears for the actions of Bear Stearns and Washington Mutual. The government encouraged JPMorgan to acquire both companies during the financial crisis, moves that ultimately helped minimize the damage that failing securities were doing to the markets at the time.

The government’s seemingly relentless onslaught of litigation against major financial institutions like JPMorgan is designed to try to teach the industry a lesson. At first blush, it appears to be working: Dimon has made it clear that rebuilding the bank’s reputation with regulators is one of his top priorities.

Reliably strong earnings are one way to make nice. In the third quarter, JPMorgan reported that consumer and community banking deposits climbed 16 percent, and credit card volume climbed 11 percent to a record $107 billion. Merchant processing volume increased 15 percent to $185.9 billion. JPMorgan’s corporate and investment bank once again claimed the top spot for global investment banking fees, and client deposits were up 10 percent, to $386 billion. Assets under custody were $19.7 trillion.

Dimon concluded the earnings report by saying: “We continue our intense focus on our legal, control, and regulatory agenda — we are simplifying our business and making unprecedented investments in controls, which will make our company better and stronger for the long-run. We are extremely gratified that, in light of the issues the Company is facing, our people continue to do an unwavering and excellent job in serving their clients and communities, which you see in the underlying performance of our businesses.”

Here’s Christopher Wheeler, a banking analyst at Mediobanca, discussing JPMorgan and banking with Bloomberg Television.

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