JP Morgan: from “fortress” balance sheet to Fort Apache the Bronx

A few years ago, Jamie Dimon, the Chairman and CEO of JP Morgan, was the “savior” of Wall Street armed with a “fortress” balance sheet.  Today eight federal agencies are investigating the bank, which has been labeled, “out of control,” by one analyst, and many shareholders will vote tomorrow on cutting Dimon’s role in half.

In 2009, Newsweek called Jamie Dimon the “government’s banker of last resort” and granted him the title, “The Banker Who Saved Wall Street.”  He worked with regulators to stabilize the markets by purchasing failing financial institutions, including Bear Stearns and Washington Mutual.

An outspoken Democrat, Dimon’s stock grew as the candidate he supported, Senator Barack Obama, was elected President.  He was rumored as a possible Secretary of the Treasury and was heralded in numerous books, magazines and articles.  From Capitol Hill to the New York Stock Exchange he was the man who could do no wrong.

Not any more.

JP Morgan’s quarterly report devotes 18 single-spaced pages to ongoing litigation which could eventually cost the company more than its reserves, according to Businessweek.

In 2012, the bank announced the “London Whale” trading loss of $2 billion, which has grown to a loss of $6 billion.  In 2013 the U.S. Senate Permanent Subcommittee on investigations found traders at JP Morgan “routinely” exceeded the firm’s trading limits and covered up their losses.

The bank was sued by the State of California for abusive credit card collection practices and the Federal Energy Regulatory Commission staff has accused JP Morgan of using illegal energy trading schemes in California and Michigan.

Among JP Morgan’s other regulatory infractions, the US Treasury fined JP Morgan for violating sanctions against Cuba, Iran, Sudan, terrorists and purveyors of weapons of mass destruction.  The Commodities Futures Trading Commission (CFTC) has fined JP Morgan for failing to separate customers’ money from the bank’s, repeatedly creating fictitious trades and violating rules in the trading of both cotton and oil.

The SEC has fined JP Morgan for securities fraud and misleading investors on mortgage backed securities.  The bank’s primary regulator, the Office of the Comptroller of the Currency has fined the company for using materially false and deceptive statements.

One perspective is that JP Morgan, as a large global institution involved in many different lines of business, is experiencing the growing pains of consolidating its recent acquisitions.  Another perspective is that J.P Morgan is too large to manage or regulate.

To some investors what is most relevant is that neither the London Whale losses, nor the lawsuits, nor the fines have stopped the bank from increasing profitability and dividends between 2009 and 2012.

But Josh Rosner, an analyst from Graham Fisher, warns that JP Morgan fines equal 12 percent of its net income, while litigation and legal fees amount to 23 percent of the same.  He classifies the company’s operations as, “out of control,” and notes the bank’s stock repurchase plan was cut in half after the London Whale loss was discovered.

Tomorrow, the bank’s shareholders may vote to keep Jamie Dimon, Chief Executive Officer and/or Chairman of JP Morgan.  Dimon has pledged to keep both titles or neither.

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