JPMorgan Chase & Co on Friday posted its first quarterly loss under Chairman and Chief Executive Jamie Dimon as a tangle of legal and regulatory probes cost the biggest U.S. bank $7.2 billion.
Dimon managed to avoid posting losses during the financial crisis after foreseeing many of the mortgage problems that beset rivals. But he was less adept at anticipating legal expenses, at least some tied to banks that JPMorgan bought during the crisis.
JPMorgan posted a loss of $380 million, or 17 cents per share, for the third quarter, its first loss since the second quarter of 2004. A year earlier it reported a profit of $5.71 billion, or $1.40 a share. Excluding litigation expenses and other special items, the bank earned a profit of $5.82 billion, or $1.42 per share.
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Analysts on average had forecast earnings of $1.17 per share excluding special items, according to Thomson Reuters I/B/E/S. It was not immediately clear if the results were comparable.
The legal expenses include money set aside for future settlements. Dimon cautioned that legal expenses will likely be elevated for the next year or two.
"I wish we could reduce the uncertainty for investors, but we can't," Dimon told reporters in a conference call, describing the litigation issues as "painful." He added in a later conference call with investors that it is "very hard to fight with your regulators and the federal government."
The bank disclosed it has set aside a total of $23 billion for settlements, fines and other legal expenses.
JPMorgan executives have long been quick to point out the bank's profitability when investors brought up its other troubles. The bank posted record profits last year, even as bad derivatives best known as the "London whale" trades resulted in $6 billion of losses.
But the third-quarter loss underscores how the bank's legal problems threaten its profitability. Regulators and prosecutors are looking into possibly fraudulent sales of mortgage securities and the bank's role in setting certain benchmark borrowing rates. The Securities and Exchange Commission is investigating possible bribery in the hiring of sons and daughters of executives of Chinese state-owned companies. The bank faces more than a dozen probes globally.
PAYOUT SEEN SAFE
Dimon, long considered one of Wall Street's savviest CEOs, has come under increasing fire for his failure to anticipate and avoid legal problems. He said on Friday there had been no discussions about management changes and that the bank was getting "a lot closer" to resolving its litigation issues.
Chief Financial Officer Marianne Lake played down the impact on shareholder returns, insisting that legal expenses would not affect JPMorgan's stock repurchase plans and saying the bank "has every intention to pay our dividends."
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JPMorgan shares were little changed in morning trading, up 3 cents to $52.55. The shares are up 19 percent so far this year, but that lags banking sector gains.
Even beyond the litigation expenses, the third-quarter results were less than spectacular, with revenue declining 8 percent to $23.9 billion as fee income and lending income both fell. JPMorgan and other U.S. banks have struggled to boost profits as loan volume has declined, interest margins have been under pressure, and fee income from debit cards and mortgages has been squeezed.
Also on Friday, Wells Fargo & Co, the largest U.S. mortgage lender, reported a 13 percent rise in third-quarter profit but saw a sharp drop in mortgage banking income as a boom in refinancing began to fade. Mortgage banking income also declined at JPMorgan, with net revenue falling 45 percent to $2.02 billion.
2008 HANGOVER
Mortgages have also been a headache on the litigation front. In September, JPMorgan tried to reach a settlement with the U.S. Department of Justice and other federal and state agencies to resolve claims against the bank over its mortgage businesses. An $11 billion settlement was discussed, according to sources familiar with the matter. Dimon went to Washington to meet with U.S. Attorney General Eric Holder on September 25, but no deal has resulted.
Some of those claims relate to mortgage bank Washington Mutual and investment bank Bear Stearns, two failing firms that JPMorgan took over in 2008.
Regulators pressed JPMorgan to acquire both companies, a fact that Dimon alluded to in a statement on Friday, noting that the bank was seeking a fair settlement with the government on mortgage related issues, "and one that recognizes the extraordinary circumstances of the Bear Stearns and Washington Mutual transactions, which were undertaken at the request or encouragement of the U.S. Government."
Speaking on CNBC earlier this month, former Treasury Secretary Hank Paulson said that JPMorgan was "begged" to take Washington Mutual and Bear Stearns, but added that JPMorgan took on potential legal liabilities as part of the deal. "Jamie knew that at the time," Paulson said.
With additional reporting by Tanya Agrawal in Bangalore and Lauren Tara LaCapra in New York, both of Reuters.
