How Does JPMorgan Chase Fare in the Midst of Many Problems?
Muhammad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
JPMorgan Chase (NYSE: JPM) is unarguably the biggest bank in the United States but it’s also the biggest bank with the biggest problems. Its problems include a flurry of recent lawsuits and a long list of regulatory probes. Just like Wells Fargo & Company (NYSE: WFC) and Citigroup (NYSE: C), JPMorgan is a financial holding company with global operations. These three big banks have many things in common; they were among the 11 major banks standing trial in a suit filed recently by FIDIC for an allegation that concerns a misrepresentation of the quality of over $388 million mortgage bonds packaged and sold as loans to the failed Alabama-based Colonial Bank. Wells Fargo & Company, Citigroup, JPMorgan and the Bank of America are also the usual suspects in many allegations of national and international regulatory breaches.
In an instance, JPMorgan was reported to be under the search light of US Department of Labor that is looking to see if the big lender, in connection with one of its stable value funds usually used in most 401(k) self-directed retirement plans, has in any way violated its fiduciary duty under the Employee Retirement Income Security Act or not. At another instance, it was reported that probes into JPMorgan’s trading deals has extended into many national and international agencies. At least, 11 enforcement agencies in the US, Singapore, Germany and Japan were reported to have joined the list of enforcement bodies currently probing the alleged trading errors within the business processes of JPMorgan.
In a self-reported style, JPMorgan Chase & Company recently submitted a long list of ongoing lawsuits and regulatory probes against the big bank in a filing with the Securities and Exchange Commission. While its alleged involvement in the manipulation of the key lending rate Libor was listed as part of the issues the bank is contending with currently. There are numerous other issues JP Morgan is being investigated right now and the least you might think of involves its alleged involvement in the manipulation of electricity markets. An analysis of JPMorgan’s self-reported list of lawsuits and regulatory probes made by Pam Martens of Wall Street On Parade shows that the issues which the biggest US bank have to resolve with the courts and regulatory bodies were stated in eight pages of about 9,000 words.
In fairness to the biggest lender, it reported recently that it has found substantial weaknesses within its internal processes and controls connected to its trading activities and as such, management had the cause to revise its first quarter financial results for 2012 to reflect the losses incurred from the trading errors. JPMorgan has revised its first quarter profits from $5.38 billion reported originally by $459 million to arrive at the new profit margin of $4.92 billion for 2012 Q1. Its earnings per share have subsequently been reviewed downward from $1.31 per share to $1.19 per share.
Some of the key issues JPMorgan has gotten itself into include the lawsuits from ‘’London Whale’’ deals where it gambled on credit derivatives and recorded losses currently estimated to be about $5.8 billion, and allegations of complicity in $130 billion worth of bad mortgage backed securities. Others include the lawsuits on Enron transactions, allegations of energy manipulations, allegations on Credit Card Swipe Fees involving alleged conspiracy with MasterCard and Visa to defraud users of fees for which the bank has agreed to pay $1.2 billion in settlement, and criminal investigations over the 2005 ‘’Milan Interest Rate Swap’’ deal where though it has already settled a civil proceeding yet it is still being investigated on criminal grounds. Also, there are several lawsuits on alleged complicity of the bank in Madoff Ponzi Scheme.
In spite of all these problems, JPMorgan remains a bank to beat in terms of earnings and profitability. The bank made a profit of about $19 billion in 2011 and the $5 billion in losses may not have a negative effect on its long term profitability. Remember that JPMorgan made it through the period of financial crisis unscathed and was regarded as the best manager of risk by Wall Street analysts. However, investors may have to wait a little longer to tap into the benefits of JPMorgan’s share buyback scheme. This is because as part of a filing the bank made with the Securities and Exchange Commission, there was a disclosure that the much awaited share buyback scheme will have to wait till first quarter of 2013, simply because of the revision of its financials and the need to clean up the multi-billion-dollar trading loss.
For investors, it is bad news that dampens hope further, because this is the second time the bank has shifted its stock repurchase forward. However, investors need to know that the bank has disclosed that it has no plans to suspend or reduce its juicy quarterly dividend. Consequently, I recommend a hold for JPM stock and a long term perspective for investors looking to buy JPM in the near future.
muhammadbazil has no positions in the stocks mentioned above. The Motley Fool owns shares of Citigroup Inc , JPMorgan Chase & Co., and Wells Fargo & Company and has the following options: short OCT 2012 $33.00 puts on Wells Fargo & Company and short OCT 2012 $36.00 calls on Wells Fargo & Company. Motley Fool newsletter services recommend Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.