JPMorgan reports Q3 loss on legal costs

New York TimesOctober 11, 2013 

JPMorgan Chase, the nation’s largest bank, reported a third-quarter net loss of $380 million on Friday as it continued to grapple with a raft of regulatory and legal woes.

The added costs dragged down JPMorgan’s results as the bank posted a net loss of 17 cents a share. JPMorgan’s earnings were eroded, in large part, by a legal expense of $9.2 billion.

“While we had strong underlying performance across the businesses, unfortunately, the quarter was marred by large legal expense,” Jamie Dimon, the bank’s chief executive, said in a statement.

The third-quarter earnings report came as JPMorgan is enmeshed in protracted negotiations with the Justice Department to resolve investigations of questionable mortgage practices.

During the negotiations – which have occurred in fits and starts – JPMorgan has offered to pay a fine of roughly $7 billion and provide $4 billion in relief for struggling homeowners to wrap up a range of mortgage-related headaches, according to people familiar with the matter. The settlement is still in flux, though, and the monetary penalties could change.

JPMorgan “continues to seek a fair and reasonable settlement with the government on mortgage-related issues – and one that recognizes the extraordinary circumstances of the Bear Stearns and Washington Mutual transactions, which were undertaken at the request or encouragement of the U.S. government,” Dimon said.

Dimon’s reference to a “fair and reasonable settlement” evokes his earlier statements, which have called the government’s investigations related to Bear Stearns unfair. JPMorgan purchased the flailing bank during the depths of the financial crisis, a deal that was blessed by the federal government.

Excluding the one-time costs, JPMorgan’s earnings were $5.8 billion, or $1.42 a share, exceeding Wall Street analysts’ expectations of $4.65 billion, or $1.21 a share.

Revenue fell to $23.9 billion, from $25.9 billion in the period a year earlier. Analysts had estimated revenue of $24.06 billion.

Marianne Lake, JPMorgan’s chief financial officer, cautioned that legal expenses were “significantly larger than even we could have anticipated even a short while ago.” Echoing Lake, Dimon expressed a desire to “reduce the uncertainty for investors,” adding that the legal headaches and tense landscape is “painful.”

Adding to its legal costs, JPMorgan agreed to pay $1 billion in September to resolve sweeping investigations into a multibillion-dollar trading loss in May 2012. As part of that payout, JPMorgan also settled investigations by the Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau into the bank’s credit card products.

To help cushion against those legal costs, JPMorgan Chase set aside $23 billion in litigation reserves – a figure that the bank has not previously disclosed. That pot of money includes the $9.15 billion, which the bank added during the third quarter.

It is the first time that JPMorgan has had a quarterly loss under the leadership of Dimon, who was hailed for his risk prowess after successfully steering the bank through the financial crisis in far better shape than its peers.

Escalating legal woes precipitated a rare quarterly loss for JPMorgan in 2004, as the bank struggled to assess its total exposure to a range of settlements related to Enron and WorldCom.

As the nation’s largest bank, JPMorgan is considered something of a bellwether for the banking industry.

Like its rivals, JPMorgan is wrestling with rising interest rates that have eroded homeowner demand for refinancing mortgages.

The banking industry has long been bracing for a slowdown in mortgage refinancing, a stream of income that had been a consistent bright spot in recent years. An uptick in interest rates this year has helped to diminish demand.

Lackluster demand was evident in JPMorgan’s third-quarter mortgage results. Loan originations were $40.5 billion, down 14 percent from the period a year earlier. Still, income from mortgage banking was $705 million for the quarter, up 13 percent from the year-ago period.

The latest turmoil is compounding concerns within the banking industry, which is already grappling with ways to offset an anemic economic environment.

The bank’s investment banking and trading, though, is helped by the shifting rates.

Within its corporate and investment bank, JPMorgan reported a 12 percent increase in net income, which was $2.24 billion for the third quarter. Fees from investment banking were $1.5 billion, up 6 percent from the period a year earlier.

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