- Posted August 21, 2013 by
The Avanti Group | JPMorgan pledges to clean up legal woes
When JPMorgan Chase emerged from the financial crisis as one of the stronger banks left in the US financial industry, the list of legal proceedings it published as part of its quarterly regulatory filings ran to two pages. Fast forward five years and that list have jumped to a startling 10 pages long.
The bank, now the second-biggest in the US by market capitalization, has been inundated by a string of recent regulatory investigations, ranging from continued fallout over the $6bn “London Whale” trading loss it incurred last year to a new criminal probe related to the sale of mortgage-backed securities before the financial crisis.
On Sunday, it emerged that US regulators were scrutinizing the bank’s hiring practices in Hong Kong – focusing on JPMorgan’s recruitment of the sons and daughters of prominent Chinese officials and business leaders. A day later came news that prosecutors were investigating whether the bank manipulated US energy markets.
The bank’s regulatory problems could well intensify in the coming months. One person familiar with the US securities regulator’s thinking said that authorities had “lost trust” with the bank, meaning additional scrutiny might be on its way.
As it faces multiple probes, JPMorgan says it is mustering its own considerable resources. Under the charismatic Jamie Dimon, chief executive, the bank has gone on a recruitment spree to shore up its internal controls and compliance procedures.
“We are swarming these issues so nothing can fall through the cracks,” said one JPMorgan executive who declined to be named. “We’ve got to be on top of everything and we’re committing a tone of resources to it.”
In its latest quarterly filing, JPMorgan lists more than three dozen separate regulatory investigations and civil lawsuits. They include a European Commission investigation into banks’ dominance of the credit derivatives market, as well as lingering private and class-action lawsuits related to the bankruptcy of energy giant Enron, the Ponzi scheme run by Bernard Madoff, and the collapse of MF Global.
As the bank’s list of legal woes increases, so too has its estimate of the potential costs relating to litigation. Its forecast of “reasonably possible losses” from litigation proceedings jumped to as much as $6.8bn on top of existing reserves in the second quarter. That is the same amount that the bank made from the interest generated by the loans and assets on its balance sheet in the same period.
“These problems were our fault, and it is our job to fix them,” Mr Dimon said in his annual letter to shareholders, adding that the company was reorganizing its internal projects to make its regulatory “control agenda” a priority.
JPMorgan escaped the financial crisis relatively unscathed, giving it an advantage over more scarred competitors. That allowed it to grow into one of the largest banks in the US, with multiple lines of business and hefty profits. The bank posted net income of $6.5bn in the most recent quarter – more than any competitor.
But the company’s complexity and size might be coming back to haunt it as regulators, more or less finished with scrutinizing the weaker banks which floundered in the financial crisis, turn their sights on the hulking JPMorgan.
Its executives will be hoping that the current pile-up of regulatory investigations and legal issues – most of which so far involve old events rather than new ones – will soon ease as the bank’s behind-the-scenes efforts come to fruition.
“We are committed to making sure that our business systems, practices, controls and culture meet the highest standards. This is our top priority,” said Joe Evangelisti, a spokesman for JPMorgan.