Despite Boost From Dimon, JPMorgan Stock Still in Rough Waters
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There is currently a debate in the news about whether or not JPMorgan Chase (NYSE: JPM) executives should give back compensation as a result of the $2 billion loss from its failed hedging strategy.
The situation is under review from U.S. bank regulators, and we should hear soon enough whether or not the company will be made to suffer this financial loss. Specifically, this review will investigate the compensation of the chief executive officers who were responsible for the trading loss. The regulators say that the company's determination to engage in "clawbacks" will also be considered in the analysis of the situation. This review will investigate whether the company gave enough information to the OCC. It will also address whether the board of director's risk committee is properly informed of these situations and is appropriately engaged in the company's decision.
This is a troubling situation for investors and makes me wonder whether or not the $2 billion loss is an even bigger problem than I initially realized. It seems that this does not "present a solvency issue," and it also fails to "threaten the broader financial system." The problem is far from being resolved though, and the company could lose as much as $5 billion by the end of this all. To me, this indicates a high degree of shoddy management that should have made a more concentrated effort to be responsible in its follow-up to the financial crisis.
The loss was a direct result of the company's decision to engage in a strategy that involved decreasing the amount of hedging that it did. This strategy, which was aimed at reducing potential losses, backfired, placing the company in the difficult position that it finds itself in now.
During the recent two hour hearing, Dimon explained that the bank took risks that were not entirely understood. He apologized for the losses and said that the bank would try to recover compensation from the employees who were at fault, though approval would be needed from the bank's directors first. Dimon will go before the House Financial Services Committee next week.
Although the stock jumped above $34 after Dimon's skillful testimony, a 1.6% gain, this mess is definitely a black mark for the bank, and it will be a long time before it is successful in restoring the trust and commitment of its investors and shareholders. There are simply too many factors indicating that the bank has been playing around foolishly with the investments of others. At the very least, this is news that should tell you to keep a close eye on the stock.
Although competitor Citigroup (NYSE: C) still plays second fiddle to HSBC Holdings (HBC) in terms of the Chinese market, the company is making progress in this area. The bank recently launched Renminbi Letters of Credit for Importers and Exporters (RMB LCs) to offer a trade services solution suite available in RMB. This will optimize the flow of trade between China and Latin-America and mark Citigroup as an innovator in the expansion of international trade. It is a sensible strategy to get involved in emerging markets, so I believe this is a good move for the company. As a result, I believe this will be beneficial to Citigroup stock.
Wells Fargo (NYSE: WFC) seems to have very little trouble keeping ahead of the others. I feel that this is due to its ability to maintain a positive public perception. The company is well known for its philanthropic activities, and it has expanded on these even further. It recently launched a $100 million grant environmental program by kicking off with a $15 million relationship with the National Fish and Wildlife Foundation (NFWF). This seems to be a good strategy to keep a good image, and it should help the stock maintain strength and go up.
Bank of America (NYSE: BAC) is selling $10.4 billion in residential mortgages to Newcastle Investment (NCT) and Nationstar Mortgage Holdings (NSM). This seems like a reasonable strategy. Bank of America is one of many bank stocks that are suffering because of the housing situation, so offloading non-core assets may help it keep its head above water. This is a positive move for the company, but I do not expect it to offset the difficulties facing the company. As a result, I expect the stock to be decreasing in spite of this decision.
JPMorgan faces competition specifically from U.S. Bancorp (NYSE: USB) in one very important area-mobile banking applications. U.S. Bancorp has introduced a number of new applications that allow iPhone and iPad users to do banking without having to enter an actual bank. I believe the most significant innovation is MobileMerchant, which allows small businesses to make secure card payments from a mobile device. This will increase U.S. Bancorp's client base, and as a result, it will also increase the bank's revenue by a significant amount. I expect good things for this stock.
JPMorgan certainly has a difficult situation to deal with, and I do not expect its problems to dissipate at any time in the near future, although Dimon's testimonies seem to be good for the stock. U.S. Bancorp is continuing to give strong competition, and several other competitors appear to be stronger investments at the moment. This is not a good time to invest in JPMorgan, and current investors should pay close attention to the continued backlash of the $2 billion loss. I think this stock will go down, at least until JPMorgan can begin to rebuild from this event that continues to haunt it.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, Citigroup Inc , JPMorgan Chase & Co., and Wells Fargo & Company and has the following options: short APR 2012 $21.00 puts on Wells Fargo & Company, short APR 2012 $29.00 calls on Wells Fargo & Company, 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.
