It’s never a good time to go head to head with swarms of federal regulators, but now is an especially bad moment for the government to be cracking down on JP Morgan.
The bank’s widely publicized onslaught of investigations coincides with a particularly uncertain time in the bond market — when the Federal Reserve’s five year experiment with quantitative easing is entering its final stages, impacting bond portfolios the world over.
JP Morgan, naturally, is no exception to this. The bank’s CFO, Marianne Lake, told attendees at a conference on Monday that the bank’s bond portfolio could lose $US15 billion on a 2% rise in interest rates.
On the other hand, higher rates do mean that JP Morgan can charge borrowers more. Lake said those two factors should help balance each other out, but, as Stephen Gandel at Forbes points out, that balancing is based on some assumptions that “don’t always work out.”
Gandel recalls Q2 2013, when interest rates on the 10 year Treasury bond “rose nearly two-thirds of a percentage point, JPMorgan’s bond portfolio dropped, down $US3.3 billion, as expected, but so did its net interest income. So much for that offset.”
How much action the Fed will take, and what impact that will have on rates, remains to be seen. What we do know is that even the rumour of the “taper” roiled bond markets early this summer.
Meanwhile, the bank has hired 3,000 more compliance employees and raised an additional $1.5 billion to combat the myriad of lawsuits it faces. It just paid out $US300 million to settle accusations that it forced homeowners to buy over-priced property insurance and entered into kickback deals that inflated policy prices, and it’s nearing a settlement over issues with its credit card collection and identity theft products.
But that still leaves a lot of serious suits on the table.
To name only two known suits, there’s the $US6 billion the FHFA is seeking over financial crisis mortgage claims. JP Morgan must also still answer for missteps during the London Whale trading loss, which, according to the Wall Street Journal, could cost it $US500-$600 million.
The list of other knowns goes on, still more troubling though, are the unknowns. U.S. Attorney General Eric Holder told the Wall Street Journal last month that Wall Street should prepare for a wave of financial crisis era lawsuits, and he was specifically asked about Jamie Dimon, JP Morgan’s CEO, and his bank.
“These are complex cases that require enormous amounts of effort to put together, but we are at a point — as you’ve seen, I think, recently — where the results of that difficult work is starting to bear fruit,” he (Holder) said…
Asked about J.P. Morgan and its chief executive, James Dimon, Mr. Holder declined to discuss specific cases, but added, “No individual, no company is above the law. We don’t investigate companies based on who a CEO is, but we don’t avoid investigating companies based on who the CEO is, either.”
All this said, it’s not like the bank didn’t see this coming. Jamie Dimon mentioned that regulators had their eyes on the bank in his annual investor letter back in April saying:
…we received regulatory orders requiring improved performance in multiple areas, including mortgage foreclosures, anti-money laundering procedures and others. Unfortunately, we expect we will have more of
these in the coming months. We need to and will do all the work necessary to complete the needed improvements identified by our regulators.
That means “derisking” the business, according to a source close to the situation. Cutting loose some of the parts of JP Morgan that could run the bank afoul of regulators, like its private equity business.
And like its physical commodities business, which was just fined $410 million to settle allegations that its traders manipulated energy markets. Regulators still aren’t done probing that part of the business yet, either, and this month the Federal Reserve will decided whether or no the bank is legally allowed to keep it either way.
That’s why the Wall Street Journal reported that the bank could circulate memos on the sale of the physical commodities business this week, and that legendary head of the business, Blythe Masters, could exit the bank as part of the deal to sell it.
Still, sources inside the bank see this as short term pain. The drudgery of learning new compliance enhancements and rejiggering the business will pay off, they say, because lets face it — JP Morgan still makes a whole lot of money.
It’s still the biggest bank on the Street.