Dimon Exceeds Mentor Sandy Weill in Legal Costs

A decade after Sanford “Sandy” Weill stepped down as Citigroup Inc.’s chief executive officer amid a cascade of regulatory investigations and lawsuits, JPMorgan Chase & Co. CEO Jamie Dimon’s legal expenses are surpassing those of his one-time mentor.

Facing probes into mortgage bonds, energy trading and hiring practices in Asia, JPMorgan took a $7.2 billion charge on Oct. 11 for expenses tied to regulatory matters and litigation, bringing the total the bank has set aside or spent since the start of 2010 to $28 billion. Weill’s tenure at Citigroup ended up leaving the bank with at least $5.5 billion in legal costs, then the most in history for a Wall Street firm.

Dimon’s reputation, burnished by more than $100 billion in profits and the rescue of failing lenders Bear Stearns Cos. and Washington Mutual Inc., has so far endured a $6.2 billion trading loss and accusations the firm manipulated U.S. power markets. Until his departure, Weill’s image also seemed to be immune to a series of scandals, according to Peter Henning, a law professor at Wayne State University in Detroit.

“Sandy Weill was the great architect who revived the American banking system and made it a global leader again,” Henning said. “And then all of a sudden it changes.”

The jump in legal expenses forced Dimon last week to report the bank’s only quarterly loss on his watch. The third-quarter deficit amounted to $380 million, compared with a profit of $5.71 billion a year earlier. The last time New York-based JPMorgan failed to report a profit was the second quarter of 2004, when William Harrison was CEO.

Total Return

Dimon still has the support of board members such as Laban P. Jackson, the audit committee chairman who moved to JPMorgan with Dimon when Bank One Corp. combined with JPMorgan in 2004. Dimon is “the best manager I’ve ever seen, and I’m old,” Jackson, 71, said yesterday at a conference in Oxon Hill, Maryland. Regulators around the world have a political agenda and “we’re just going to have to put up with this,” he said.

Under Dimon, JPMorgan has overtaken Citigroup as the top corporate bond underwriter and Goldman Sachs Group Inc. as the biggest bank in debt-trading revenue. The company has set profit records in each of the past three years and among the six biggest U.S. banks only Wells Fargo & Co. has exceeded the stock’s 40 percent total return, which includes price gains and reinvested dividends, since Oct. 12, 2010.

Profits Collapsed

While JPMorgan’s $21.3 billion profit last year beat its U.S. bank peers in 2012, it wasn’t a record for the industry. Citigroup, where Weill remained as chairman until April 18, 2006, reported $21.5 billion in earnings that year before profits collapsed to $3.62 billion the next. In the three years before Weill handed over his CEO duties to Charles Prince on Oct. 1, 2003, Citigroup shares had a negative total return.

JPMorgan isn’t alone in facing escalating legal costs -- the six biggest U.S. banks combined have piled up more than $103 billion in expenses for settlements, lawyers and litigation since the financial crisis, according to data compiled by Bloomberg in August. Similarly, Citigroup’s legal costs during Weill’s tenure were a magnified version of expenses sustained across the industry.

Weill, 80, hired Dimon, 57, as his assistant at American Express Co. in 1982. After Dimon helped his mentor assemble the first so-called universal bank with Citigroup’s 1998 merger with Travelers Group Inc., the protege clashed with other executives and was fired. He then led Chicago-based Bank One.

Supplanting Citigroup

Dimon’s stature grew as he guided JPMorgan profitably through the financial collapse, supplanting Citigroup as the largest U.S. bank with a $2.4 trillion balance sheet. Since then, his bank has had to set aside more money for litigation expenses than any other lender -- more than $100,000 for each of its 255,041 employees.

“Weill is remembered for arranging the biggest, most ambitious financial deal ever, which became unmanageable fairly soon thereafter,” said Roy Smith, a finance professor at New York University’s Stern School of Business. “Dimon is scored today as being an excellent manager of an equally large and complex organization which few managers in the industry have been able to keep up with.”

Weill didn’t respond to a message seeking comment left with an assistant. Joe Evangelisti, a JPMorgan spokesman, declined to comment.

Eliot Spitzer

Weill resigned in 2003, three months after his bank agreed to pay $400 million as part of settlement over biased stock research. Then-New York Attorney General Eliot Spitzer had uncovered documents showing Weill asking an analyst at New York-based Citigroup to reconsider a rating on AT&T Corp. at a time when the bank was seeking investment-banking business from the phone company.

Weill and board members said at the time that the timing of his resignation was unrelated to outside pressure. His successor had been Citigroup’s top lawyer and worked with regulators to settle claims over conflicts of interest in the firm’s research.

Prince set about cleaning up some of the regulatory and legal issues left behind by Weill. About a year after becoming CEO, Prince bowed in a traditional Japanese gesture of contrition at a press conference in Tokyo after regulators ordered the firm to shut its private bank there.

Citigroup also paid $2 billion in 2005 to end a suit by Enron Corp. shareholders and $2.7 billion to settle with WorldCom Inc. investors. Plaintiffs claimed its investment-banking services let accounting irregularities at those companies go undetected before their collapse.

Dimon’s ‘Tempest’

Dimon also has displayed regret publicly. After initially dismissing reports of the trading loss as a “tempest in a teapot,” he called it the “stupidest and most embarrassing situation I have ever been a part of” in an April letter to shareholders.

He’s taking steps to satisfy regulators. In July, the bank put its physical commodities unit up for sale and reached a $410 million settlement with the Federal Energy Regulatory Commission over allegations it manipulated power markets. The company agreed Sept. 19 to pay about $1.3 billion to resolve U.S. and U.K. investigations of the trading loss and to settle unrelated claims it unfairly charged customers for credit-monitoring.

The bank has said it’s cooperating with a U.S. examination into its hiring practices in Asia. It’s also negotiating with federal and state authorities toward a potential $11 billion settlement of a series of mortgage-bond investigations, a person familiar with the talks said last month. The company said Oct. 11 that it would stop lending to check-cashing businesses and end checking accounts for some foreign officials. To prevent future wrongdoing, the firm is assigning at least 5,000 people to compliance, Dimon wrote in a memo to staff last month.

Singled Out

JPMorgan has been singled out by regulators with “unprecedented aggressiveness,” NYU’s Smith said in an e-mail. “Most of these settlements either would not have been necessary or would have been for much lesser amounts in Weill’s time.”

JPMorgan’s board and investors showed their support for Dimon earlier this year. While other executives were pushed out over the trading loss, Dimon saw his pay halved. Shareholders backed him in a May referendum on whether to end his dual role as chairman and CEO.

Asked on Oct. 12 to respond to a Los Angeles Times article that said he should consider stepping down, Dimon responded by talking about the bank’s focus on customers.

“Wow, that’s heavy stuff,” Dimon said to the Washington event’s moderator, without saying whether he’d considered resigning as head of the company. “Our clients are very happy with us right now. We’re gaining market share. That’s what matters to me.”

JPMorgan fell 1 cent to $52.51 on Oct. 11, after the legal expenses were disclosed. The stock has climbed 19 percent this year. Shareholders may give Dimon a pass as long as JPMorgan keeps churning out cash, Wayne State’s Henning said.

“I expect the market’s looking at this going, ‘Once JPMorgan puts this behind it, it will go back to being a money machine,’” Henning said. “Sandy Weill got a free pass for a long time.”

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