JPMorgan’s Dimon Posts First Loss on $7.2 Billion Legal Cost

JPMorgan Chase & Co. reported its first loss under Chief Executive Officer Jamie Dimon after taking a $7.2 billion charge to cover the cost of mounting litigation and regulatory probes.

The third-quarter loss was $380 million, or 17 cents a share, compared with a profit of $5.71 billion, or $1.40, a year earlier, the New York-based company said today in a statement. The last time the bank failed to report a profit was the second quarter of 2004, when William Harrison was CEO.

“Over the last few weeks the environment has become highly charged and very volatile,” Chief Financial Officer Marianne Lake said on a conference call. “Things have been very fluid and the situation escalated to the point where we are facing very large premiums and penalties, the level of which have gone far beyond what we reasonably expected.”

Dimon, 57, who led JPMorgan to record earnings in each of the past three years, is grappling with regulatory investigations and tightening internal controls following a trading loss last year of more than $6.2 billion. The legal costs contributed to a 54 percent surge in non-interest expenses to $23.6 billion, as revenue dropped 8 percent from a year earlier.

‘Very Painful’

“This is very painful for the company,” Dimon told analysts on the call. JPMorgan has spent $8 billion on litigation and set aside $20 billion toward legal and regulatory costs since January 2010. Those expenses will remain elevated for the next year or two, according to Dimon.

“We would love to reduce the uncertainty around this for ourselves and for you, but it’s very, very hard to do,” he said.

JPMorgan was little changed at $52.49 at 11:01 a.m. in New York trading. Earnings adjusted for one-time items were $1.42 a share, exceeding the $1.30 average estimate of 20 analysts surveyed by Bloomberg.

The pretax legal charge was $9.2 billion, compared with $684 million a year earlier. Litigation reserves at the end of September were $23 billion, the bank said, adding that “reasonably possible” losses in excess of those reserves were $5.7 billion.

JPMorgan said on Aug. 7 that its mortgage-bond sales practices were under criminal investigation by U.S. prosecutors in California. The company has been discussing a potential $11 billion deal with state and federal authorities to settle that case as well as other related investigations, a person with knowledge of the talks said last month.

Asia Probe

The firm is also facing an investigation of its hiring practices in Asia and a criminal inquiry into its energy trading business.

The company agreed on Sept. 19 to pay about $1.3 billion to resolve U.S. and U.K. investigations into a record trading loss in its chief investment office last year and to settle unrelated claims it unfairly charged customers for credit-monitoring products.

Two former employees were indicted Sept. 16 on charges including securities fraud and conspiracy in connection with the trading loss on credit derivatives that exceeded $6.2 billion last year. Bruno Iksil, who built the position and came to be known as the London Whale because of the size of the bets, is cooperating in the investigation and hasn’t been charged, prosecutors said.

Multiple Agencies

“As we settle, as we negotiate, remember there are multiple agencies involved in every case now,” Dimon said on the conference call. The company has so far paid fines to four different agencies for its trading loss last year and may be penalized by a fifth, “which we did not expect,” he said.

“We just have to deal with it and the reality as it is,” Dimon said. “It will abate over time.”

Revenue at the corporate and investment-banking unit, run by Daniel Pinto and Michael Cavanagh, declined 2 percent to $8.19 billion.

Trading revenue fell 2 percent to $4.69 billion in the third quarter, the bank said. Fixed-income trading revenue declined 8 percent to $3.44 billion from a year earlier. Equity trading revenue rose 20 percent to $1.25 billion.

Ten-year Treasury yields, which are used to set rates for some consumer and corporate loans, rose from this year’s low of 1.63 percent on May 2 to 3 percent on Sept. 5. Rising rates reduce the value of banks’ bond holdings and cut mortgage-fee revenue for home lenders such as JPMorgan and Wells Fargo & Co., which reported a 13 percent profit increase today as improving credit quality allowed it to reclaim surplus reserves.

Refinancings Drop

Refinancings, which accounted for 76 percent of last year’s $1.75 trillion in loan originations, slumped after rates on 30-year loans jumped from historical lows of less than 3.5 percent earlier this year to an average of 4.32 percent at the end of September, data compiled by Freddie Mac show. Mortgage volumes were estimated to have fallen 25 percent from $494 billion in the second quarter to $369 billion in the third, according to data from the Mortgage Bankers Association, a Washington-based trade group.

“This quarter is probably going to be the most challenging quarter the banks are going to have since they began their recovery over two years ago,” Marty Mosby, an analyst with Guggenheim Securities in New York, said in a Sept. 30 interview. Interest rates that rose “shockingly high” damped trading results and “paralyzed” home lending, which had been gaining momentum in the first half of the year, he said.

Consumer Bank

JPMorgan’s consumer and community banking, which includes home loans and checking accounts, earned $2.7 billion, up 15 percent from a year earlier. The net interest margin, which measures the profit margin on lending, narrowed to 2.18 percent from 2.43 percent a year earlier and 2.2 percent in the second quarter of this year.

Mortgage fees and related revenue plunged 65 percent to $839 million, compared with $2.38 billion a year earlier.

Fewer consumers fell behind on their credit-card payments in the third quarter compared with the same period in 2012. Loans at least 30 days overdue, a signal of future write-offs, dropped to 1.69 percent from 2.15 percent in 2012. Write-offs declined to 2.86 percent from 3.57 percent the prior year and 3.31 percent in the previous quarter.

Revenue in asset management, which includes JPMorgan’s mutual-fund family, retirement planning, hedge funds and private bank, rose 12 percent to $2.76 billion, and profit increased 7 percent to $476 million. Run by Mary Erdoes, the division grew assets under management 12 percent to $1.54 trillion.

Annual Profit

Mounting fines and other sanctions are eroding JPMorgan’s profit for the year and placing the firm’s $6 billion share-repurchase program at risk, Charles Peabody, an analyst at Portales Partners LLC, wrote in a Sept. 25 note to investors. He cut his 2013 earnings estimate 12.5 percent to $4.90 a share.

“Both the materiality of the potential litigation charges and the potential suspension of the share-repurchase program could have a significant impact” on the bank’s stock, Peabody wrote.

JPMorgan slowed its pace of stock buybacks in the third quarter. The bank repurchased $739.7 million of shares in the period, down from $1.17 billion in the three months ended June 30 and $2.58 billion in the first quarter of the year.

Shareholder Vote

Dimon survived a shareholder vote in May recommending the board split his dual duties as chairman and CEO. He said the bank will fight “till the end” anyone who sues the company claiming they were misled over the London losses at the chief investment office.

The CEO stepped down as chairman of JPMorgan’s main operating subsidiary July 1, according to a person briefed on the matter. JPMorgan has sought to bolster corporate governance and rebuild its relationship with supervisors after U.S. regulators and a Senate panel faulted the firm for withholding information during the trading losses last year.

Dimon, who is still chairman of the parent corporation, handed off the title at the subsidiary because company attorneys recommended it for technical reasons, rather than because of pressure from regulators or investors, said the person.

The board cut Dimon’s pay in half for 2012 after concluding that he bore some responsibility for the trading loss. It also credited his leadership for the lender’s performance. JPMorgan reported a third straight year of record profit in 2012 with $21.3 billion of net income.

The investigations are “a concerted effort to convince Jamie Dimon that he needs to be much more accepting of regulatory suggestions,” Mosby said. Dimon, who has railed against excessive regulation and once publicly challenged Fed Chairman Ben S. Bernanke on new bank rules, needs to “work with regulators instead of fight with regulators,” Mosby said.

Before it's here, it's on the Bloomberg Terminal.