Why JPMorgan’s current woes may be the least of its problems

October 10, 2013

People tend to spend way too much time worrying about what’s in the headlines and not enough time worrying about things, buried in small type, that are less obvious but lots more important. Today’s case in point: JPMorgan Chase.

JPM, as we’ll call it, has been playing the role of pinata as plaintiffs and regulators seek to extract billions from what is the nation’s biggest bank, one that has been earning record profits.

However, the headlined billions will be less costly to JPM than they appear, because most of what it shells out is likely to be tax-deductible, reducing the final cost considerably. JPM’s bigger — and far less obvious — problems are worse than the headlined ones. They involve changes in the way that mega-giant financial firms are being treated by central banks and other regulators.

JPM has to hire thousands of employees to beef up its customer service and compliance efforts. It has given up some businesses. Moreover, it will have to add substantial amounts of capital because of special regulations governing a few gigantic institutions that regulators didn’t dare break up — but would love to see break up voluntarily. These outfits are going to have to post lots more capital, relative to their assets, than smaller institutions. JPM is likely to be hit especially hard because it does a ton of business dealing derivatives, where regulators are likely to impose far stiffer capital requirements.

Adding lots of capital will put downward pressure on key metrics, such as earnings per share (because there will be more shares outstanding) and return on equity (because JPM’s equity — finance-speak for its net worth — would be higher as a percent of assets).

After today’s headlines fade, which they will, JPM will have to buck a lot of head winds if it wants to remain a giant, global, high-return, multi-business financial institution rather than become a smaller, more focused institution, as many of its competitors are. The question isn’t whether its return metrics will decline, but by how much.

In the past, companies like JPM could keep returns high by increasing their use of borrowed money, relative to their net worth. But that’s the kind of thing that regulators will supposedly put the kibosh on this time around.

The company, engaged in complex negotiations to settle the various legal actions and charges against it, declined comment. But you can derive JPM’s response to the points I’m raising from material on its investor relations Web site, including chief executive Jamie Dimon’s last two annual shareholder letters.

JPM says that being in a zillion businesses is good, because that diversifies its risks. It also says that many of its far-flung businesses — such as credit cards, investment banking, branch banking and business lending — are poised to grow strongly because of the capital and effort JPM has invested in them over the past five years. Finally, JPM says, many of its businesses are the best in their class or close to it, and that high quality will bear profitable fruit.

That all could, in theory, prove to be the case. But I have serious doubts. The “London Whale” episode showed that JPM’s controls and internal discipline were far less effective than people (including me) had thought. And the array of charges against JPM make you wonder whether any firm that big and diversified and aggressive can be effectively managed, even by someone like Jamie Dimon. (I still have a lot of respect for him, JPM’s current problems notwithstanding, although he hurt himself badly by his endless whining about big business supposedly being demonized by the government.)

JPM will ultimately pay its way out of the problems that have kept it in the headlines. But then the less obvious problems will begin to make themselves apparent. And unlike today’s problems, tomorrow’s can’t be solved just by writing checks. 

Disclosure: I own $2,100 of JPM stock, the result of having bought one share of a Detroit bank 40 years ago when I was the banking reporter at the Detroit Free Press.

Sloan is Fortune magazine’s senior editor at large.

SECTION: {section=business, subsection=economy}!!!
INITIAL commentConfig: {includereply=true, canvas_permalink_id=washpost.com/8bvh5zpd9k, allow_comments=true, commentmaxlength=2000, includeshare=true, display_comments=true, canvas_permalink_app_instance=m6yzjj840m, display_more=true, moderationrequired=false, includefeaturenotification=true, defaultsort=reverseChronological, canvas_allcomments_id=washpost.com/km4ey0dajm, comments_period=14, includevoteofftopic=false, allow_videos=false, includesorts=true, markerdisplay=post_commenter:Post Commenter|staff:Post Writer|top_commenter:Post Forum|top_local:Washingtologist|top_sports:SuperFan|fact_checker:Fact Checker|post_recommended:Post Recommended|world_watcher:World Watcher|cultuer_connoisseur:Culture Connoisseur|weather_watcher:Capital Weather Watcher|post_contributor:Post Contributor, childrenitemsperpage=3, includeheader=true, includeverifiedcommenters=true, defaulttab=all, includerecommend=true, includereport=true, maxitemstop=3, source=washpost.com, allow_photos=false, maxitems=15, display_ugc_photos=false, includepause=true, canvas_allcomments_app_instance=6634zxcgfd, includepermalink=false}!!!

UGC FROM ARTICLE: {allow_comments=true, allow_photos=false, allow_videos=false, comments_period=14, comments_source=washpost.com, default_sort=, default_tab=, display_comments=true, is_ugc_gallery=false, max_items_to_display=15, max_items_to_display_top=3, moderation_required=false, stream_id=}!!!

FINAL commentConfig: {includereply=true, canvas_permalink_id=washpost.com/8bvh5zpd9k, allow_comments=true, commentmaxlength=2000, includeshare=true, display_comments=true, canvas_permalink_app_instance=m6yzjj840m, display_more=true, moderationrequired=false, includefeaturenotification=true, defaultsort=reverseChronological, canvas_allcomments_id=washpost.com/km4ey0dajm, comments_period=14, includevoteofftopic=false, allow_videos=false, includesorts=true, markerdisplay=post_commenter:Post Commenter|staff:Post Writer|top_commenter:Post Forum|top_local:Washingtologist|top_sports:SuperFan|fact_checker:Fact Checker|post_recommended:Post Recommended|world_watcher:World Watcher|cultuer_connoisseur:Culture Connoisseur|weather_watcher:Capital Weather Watcher|post_contributor:Post Contributor, childrenitemsperpage=3, includeheader=true, includeverifiedcommenters=true, defaulttab=all, includerecommend=true, includereport=true, maxitemstop=3, source=washpost.com, allow_photos=false, maxitems=15, display_ugc_photos=false, includepause=true, canvas_allcomments_app_instance=6634zxcgfd, includepermalink=false}!!
Comments
SECTION: {section=business, subsection=economy}!!!
INITIAL commentConfig: {includereply=true, canvas_permalink_id=washpost.com/8bvh5zpd9k, allow_comments=true, commentmaxlength=2000, includeshare=true, display_comments=true, canvas_permalink_app_instance=m6yzjj840m, display_more=true, moderationrequired=false, includefeaturenotification=true, defaultsort=reverseChronological, canvas_allcomments_id=washpost.com/km4ey0dajm, comments_period=14, includevoteofftopic=false, allow_videos=false, includesorts=true, markerdisplay=post_commenter:Post Commenter|staff:Post Writer|top_commenter:Post Forum|top_local:Washingtologist|top_sports:SuperFan|fact_checker:Fact Checker|post_recommended:Post Recommended|world_watcher:World Watcher|cultuer_connoisseur:Culture Connoisseur|weather_watcher:Capital Weather Watcher|post_contributor:Post Contributor, childrenitemsperpage=3, includeheader=true, includeverifiedcommenters=true, defaulttab=all, includerecommend=true, includereport=true, maxitemstop=3, source=washpost.com, allow_photos=false, maxitems=15, display_ugc_photos=false, includepause=true, canvas_allcomments_app_instance=6634zxcgfd, includepermalink=false}!!!

UGC FROM ARTICLE: {allow_comments=true, allow_photos=false, allow_videos=false, comments_period=14, comments_source=washpost.com, default_sort=, default_tab=, display_comments=true, is_ugc_gallery=false, max_items_to_display=15, max_items_to_display_top=3, moderation_required=false, stream_id=}!!!

FINAL commentConfig: {includereply=true, canvas_permalink_id=washpost.com/8bvh5zpd9k, allow_comments=true, commentmaxlength=2000, includeshare=true, display_comments=true, canvas_permalink_app_instance=m6yzjj840m, display_more=true, moderationrequired=false, includefeaturenotification=true, defaultsort=reverseChronological, canvas_allcomments_id=washpost.com/km4ey0dajm, comments_period=14, includevoteofftopic=false, allow_videos=false, includesorts=true, markerdisplay=post_commenter:Post Commenter|staff:Post Writer|top_commenter:Post Forum|top_local:Washingtologist|top_sports:SuperFan|fact_checker:Fact Checker|post_recommended:Post Recommended|world_watcher:World Watcher|cultuer_connoisseur:Culture Connoisseur|weather_watcher:Capital Weather Watcher|post_contributor:Post Contributor, childrenitemsperpage=3, includeheader=true, includeverifiedcommenters=true, defaulttab=all, includerecommend=true, includereport=true, maxitemstop=3, source=washpost.com, allow_photos=false, maxitems=15, display_ugc_photos=false, includepause=true, canvas_allcomments_app_instance=6634zxcgfd, includepermalink=false}!!
Show Comments
Most Read Business