In the past few months, the nation’s biggest bank has found itself ensnared in a series of probes and litigation that may trump the legal woes of other mega-banks. JPMorgan is staring down six separate investigations by the Justice Department, four by the Securities and Exchange Commission and three by the Commodity Futures Trading Commission, according to the bank’s second-quarter filing.
There are also probes being conducted by the Federal Reserve, the Office of the Comptroller of the Currency, Congress and British authorities. And that is only the investigations. The bank is also facing a mountain of individual and class-action lawsuits.
As a result of these cases, JPMorgan said it anticipates $6.8 billion in future legal costs in excess of the money it has already set aside to handle litigation. That is larger than the amount that other banks have added to their reserves, according to analysis from Barclays Research.
At this rate, JPMorgan is on track to unseat Bank of America as the bank with the greatest legal troubles. Bank of America has held that title for nearly three years because of litigation tied to its 2008 acquisition of beleaguered mortgage lender Countrywide Financial. The bank is still battling cases, but the number has waned.
Almost every corner of JPMorgan’s business is under scrutiny from state, federal and international authorities. Regulators are investigating the way the bank recouped credit card debts from delinquent borrowers, how it marketed mortgage-backed securities and whether it turned a blind eye to Bernie Madoff’s Ponzi scheme.
The Wall Street Journal reported Monday that the Justice Department is also looking into whether the bank manipulated energy markets, an allegation that led to a $410 million settlement with the Federal Energy Regulatory Commission last month. Meanwhile, the SEC is investigating whether JPMorgan hired the children of Chinese officials to boost its business in China, according to a person familiar with the case who spoke on the condition of anonymity.
The bank’s biggest legal headaches are tied to its handling of the $6.2 billion trading losses that originated in its London office. Congress, the Fed, the SEC, the Office of the Comptroller of the Currency, the Commodity Futures Trading Commission, the Justice Department and British authorities are all investigating the bank’s chief investment office because of the trading blunder, according to a public filing.
JPMorgan declined to discuss any of the ongoing investigations, as did the federal prosecutors and regulators running the probes.
In an annual letter to shareholders, JPMorgan chief executive Jamie Dimon said the bank is “dramatically strengthening how we carry out our compliance mission, including significantly increasing our compliance staff.”
Hundreds of employees at JPMorgan have been redeployed and tens of millions of dollars have been spent to handle the investigations, according to a person familiar with the matter who was not authorized to speak publicly.
The mounting legal battles for JPMorgan are a surprising turn for a bank once upheld as the model of good risk management and oversight. The bank came through the financial crisis virtually unscathed under the guidance of Dimon, who as a result became a respected voice of the industry in Washington.
But congressional investigations and regulatory actions against JPMorgan have chipped away at that reputation and raised questions about whether the bank is too big to manage. The bank remains one of the most profitable in the industry, netting $6.5 billion in the most recent quarter, but may be a victim of its own success, according to banking analyst Dick Bove of Rafferty Capital.
He said the government is targeting JPMorgan to further a larger agenda of breaking up all big banks. Bove said the latest round of probes could damage JPMorgan’s relationship with its customers, employees and investors, who may abandon the bank amid the cloud of suspicion.
“The end goal is to render JPMorgan in a position where it’s not big enough to pose any systemic risk to the financial system,” Bove said. “If the government can bring down the biggest bank in the United States, it will be much easier to bring down others.”
Securities lawyer Andrew Stoltmann contends that there is enough troubling evidence about JPMorgan’s dealings to raise concerns about its business practices. He does agree that the onslaught of regulatory probes will strengthen the push for stronger oversight of large institutions.
“The biggest impact will be emboldened regulators who are hashing out and hammering out details of Dodd-Frank,” he said, referring to the Wall Street regulatory overhaul law. “When you have banks paying multibillion-dollar fines, the optics are horrible.”
“It reduces the credibility of banks when they are arguing for less restrictive rules,” Stoltmann said.