The London Whale Won’t Stop JPMorgan From Beating the Competition


JPMorgan Chase & Co. (NYSE:JPM) earned $13.1 billion in investment bank revenues in the first half of 2013, according to a report compiled by analytics firm Coalition. JPMorgan’s haul accounted for just more than 15 percent of total investment banking revenues, putting it ahead of of rivals like Goldman Sachs (NYSE:GS), Bank of America (NYSE:BAC), and Citigroup (NYSE:C) in Coalition’s investment banking league table.

In its second-quarter earnings presentation, JPMorgan reported that IB fees climbed 38 percent on the year to $1.7 billion, “primarily driven by strong debt and equity underwriting.” When earnings were released in July, the bank was leading the industry in year-to-date IB fees, with 8.9 percent of the global share. JPMorgan also took the top IB spot in 2012 but only had 7.5 percent share of global fees.

JPMorgan also claimed the No. 1 spot in the Global Debt, Equity & Equity-related, Global Long-term Debt, and Global Loan Syndications categories, according to its earnings report. According to the Coalition report, JPMorgan took the top global spot for Equities and Origination & Advisory.

The bank’s ongoing success is not necessarily surprising — JPMorgan routinely sits at or near the top of various league tables — but right now, its reputation is somewhat muddied by a mountain of litigation. The bank has reached an agreement with authorities in the United States and the United Kingdom to settle the London Whale case for as much as $920 million, plus an admission of wrongdoing.

“JPMorgan failed to keep watch over its traders as they overvalued a very complex portfolio to hide massive losses,” said George S. Canellos, co-director of the U.S. Securities and Exchange Commission’s Division of Enforcement. “While grappling with how to fix its internal control breakdowns, JPMorgan’s senior management broke a cardinal rule of corporate governance and deprived its board of critical information it needed to fully assess the company’s problems and determine whether accurate and reliable information was being disclosed to investors and regulators.”

The news comes about one month after the SEC 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. While the most recent settlement does not call out any individuals at the bank, it does call for JPMorgan to admit wrongdoing.

As revealed by JPMorgan’s most recent 10-Q filing with the SEC, the firm is responding to investigations relating to its offerings of mortgage-backed securities between 2005 and 2007. JPMorgan has also been accused of manipulating energy markets in California, failing to identify and prevent money-laundering activities (this includes a dubious case against the firm related to its handling of former client Bernie Madoff), and allegations that it misled customers regarding some credit card purchases and debt-collection practices.

Federal regulators have spent years investigating and litigating practices that contributed to the financial meltdown. The SEC even spent two years investigating Lehman Brothers, the firm that was at the heart of the crisis, and while the probe hit one dead end after another without a single civil charge filed, the resulting report showed bank officials used accounting maneuvers known as “balance sheet manipulation” to mislead shareholders into thinking the firm was healthy until five days before it collapsed.

In a way, Lehman was a shining example of what went wrong with the American banking system: It made bad bets on mortgage-backed securities, and when its finances became dicey, management attempted to hide the problem. But because it was allowed to fail, Lehman’s history was much different than many other firms that invested heavily in mortgage-backed securities.

Other firms were hastily incorporated into other institutions to avoid further disaster — a solution that could not be worked out for Lehman. During the crisis, the Federal Reserve and the U.S. Treasury fought to prevent the complete collapse of the American banking system: Bear Stearns was sold to JPMorgan Chase, and Bank of America bought Merrill Lynch, transactions that can be described as quasi-shotgun marriages aimed at saving those brokerages.

While the SEC failed with Lehman Brothers — despite reviewing more than 15 million company documents and interviewing some three dozen witnesses — other financial institutions like JPMorgan and Bank of America have been faced with a seemingly never-ending torrent of lawsuits.

Thanks to its 2008 acquisition of Countrywide Financial and Merrill Lynch, Bank of America has been drawn into federal court for years regarding its mortgage business. To settle claims of a wide range of financial misconduct perpetrated by Countrywide Financial alone, Bank of America has spent more than $45 billion. The purchase cost of that brokerage was just $2.5 billion.

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