Due in large part to the $9.2 billion it set aside to cover mounting legal expenses, JPMorgan Chase, the nation’s largest bank, suffered its first quarterly loss under CEO Jamie Dimon. JPMorgan reported a loss of $380 million, or 17 cents per share for the third quarter, compared with a profit of $5.71 billion, or $1.40 per share just a year earlier. This cast a somber tone for the unusually humble Dimon, stating that the loss was “very painful for me personally.”
The size of the loss was beyond what investors expected. According to CFO Marianne Lake, “We didn’t, until a few weeks ago, reasonably expect things to escalate to where they are now.” Expecting additional legal expenses, Mr. Dimon added that legal costs could “continue to be volatile over the next several quarters.” JPMorgan’s total reserve for legal issues is now $23 billion.
The bank’s legal issues are widespread. JP Morgan is involved in over a dozen investigations globally, including whether it fraudulently sold U.S. mortgage securities and whether it violated anti-bribery laws in hiring the children of executives of Chinese state-owned companies. “There are multiple [government] agencies involved in every case now,” said Dimon. The company has paid fines to four different agencies for its trading loss last year and may be penalized by a fifth, “which we did not expect,” he said.
JPMorgan’s legal troubles have resulted in earnings for the country’s top law firms. WilmerHale represented JPMorgan in the “London Whale” case and is also handling the federal inquiry into JPMorgan’s energy trading business. Meanwhile, Sullivan & Cromwell is defending JPMorgan against claims filed by the Federal Housing Finance Agency, alleging that JPMorgan duped Fannie Mae and Freddie Mac into buying a combined $33 billion in mortgage-backed securities. Also, in August, JPMorgan hired Paul, Weiss, Rifkind, Wharton & Garrison to handle the SEC’s investigation of the bank’s hiring practices in China.
Before JPMorgan’s quarterly results were revealed, projections for Corporate America’s earnings were at least moderate. This all changed according to FactSet senior earnings analyst, John Butters, who revealed that the blended growth rate for Q3 S&P 500 earnings – a combination of actual figures from companies that have reported and expectations for those yet to issue results – “dropped a full 2 percentage points, from 2.8% to just 0.8% in a week, owing almost entirely to [JPMorgan’s woes].” While the bank’s loss lowered the projected growth rates for the broader S&P 500, it also emphasized an unsteady start to the third-quarter reporting season. According to Butters, 61% of the 31 companies that have issued results [through October 11] beat expectations, compared to the 73% average of the past four years.