Shares of JPMorgan Chase & Co. (NYSE:JPM), America’s largest bank by assets, stood their ground on Monday morning after news broke that the firm faces a tentative $13 billion settlement with the Department of Justice. Sources told Bloomberg that Chairman and CEO Jamie Dimon negotiated the terms of the deal with U.S. Attorney General Eric Holder after markets closed on Friday evening.
The deal appears to resolve claims related the sale of faulty mortgage-backed securities by subsidiaries Bear Stearns and Washington Mutual, which JPMorgan acquired in the chaos of the financial crisis.
At a glance, the charge against JPMorgan has two major downsides shareholders could react negatively to: one, the $13 billion settlement is larger than the $11 billion figure originally estimated a few weeks ago; and two, the settlement does not absolve the firm of the possibility of criminal litigation. The first is a relatively minor blow to the bank’s bottom line, but the second leaves the door open for all sorts of unattractive uncertainty.
Sources familiar with the matter told Bloomberg that Holder insisted that the possibility of criminal charges remain on the table.
While the sheer volume of litigation facing JPMorgan would crush a lesser bank, the Dimon’s firm has a few things going for it that serve as a sort of backstop. For one, the bank performed relatively well during and in the wake of the financial crisis — shares have outperformed peers such as Citigroup (NYSE:C) and Bank of America (NYSE:BAC) over the past five years by leaps and bounds. Numbers often speak louder than words, and although JPMorgan tripped to a net loss in the third quarter because of litigation expenses, shareholders recognize that the bank is structurally sound.
The second thing holding shareholder optimism in place is Dimon himself. Major shareholders and members of the bank’s board of directors have cited Dimon’s reputation as one of the best managers on Wall Street as reason enough to maintain their bullish position on the company. There’s no hiding the fact that JPMorgan is sailing through a storm, but there’s no one who knows how to steer the ship better than Dimon.
As much as $4 billion of the tentative $13 billion settlement is expected to go to the Federal Housing Finance Agency, which is also seeking $6 billion from Bank of America. Regulators have indicated that the settlement with JPMorgan could be used as a template to move forward with litigation against other banks accused of selling faulty mortgage-backed securities during the financial crisis.
Both JPMorgan and Bank of America have been beat up over the past three-month period, but finally settling outstanding issues with regulators could prove to be a positive catalyst for the firms.