Reports this weekend are that JPMorgan Chase, the nation's largest bank, has reached tentative agreement on a record $13 billion settlement with federal prosecutors over its role in packaging the bad mortgage securities that were a key cause of the financial crisis. Beyond the immediate details of the potential settlement, the situation raises a bigger question, which Wonkblog posted earlier this month. Is JPMorgan Chase too big to manage?
The financial crisis five years ago was devastating for Wall Street, bringing down investment houses and banks that had generations of history behind them. But amid the financial chaos, one bank stood tall as the port in the storm, possessor of a "fortress balance sheet" that helped it escape from the crisis bigger and stronger.
Unlike its competitors, JPMorgan Chase managed to eke out a profit even in the worst period of the crisis, the third and fourth quarter of 2008, as it has in every single quarter since 2004 and during CEO Jamie Dimon's tenure.
Until now, that is. The bank reported a third quarter loss Friday, caused by a whopping $9.2 billion put aside for legal costs.The financial crisis wasn't enough to swing Dimon's bank to a loss. But the legal bills that resulted from the bad behavior that helped cause the crisis sure did. JPMorgan now has $23 billion in "litigation reserves" set aside, meaning that is its best guess of what it will ultimately owe in settlements.
It's worth noting that a big part of those legal costs stem not from the actions of JPMorgan itself before and during the crisis, but from other companies that it acquired during that period when they were faltering. Washington Mutual was responsible for a lot of the troublesome mortgage lending practices for which JPMorgan is now paying, and Bear Stearns was responsible for packaging many of the faulty collateralized debt obligations and other exotic financial instruments that proved worthless when things went bad.
When JPMorgan took them over in 2008, in deals aided and encouraged by the government, it helped prevent a broader economic collapse, but also exposed the bank to liability for misdeeds by those firms. (It also let JPMorgan gain a foothold into some new businesses on the cheap, so no one should feel too sorry for Dimon and JPMorgan shareholders).
And some of the legal problems have nothing to do with the crisis, most notably $1.3 billion in settlements for trading by the "London Whale" that also led to $6 billion in direct losses for the bank. And then there are legal issues JPMorgan is facing that aren't close to resolution, like an investigation into whether its hiring of the children of Chinese officials constituted bribery.
Put all these things together, and the sheer volume of legal issues facing America's largest bank, with $2.4 trillion in assets and operations in every corner of the earth, should pose some questions. At some point, does a financial institution become so big and sprawling that it has expanded beyond the ability of the board and CEO and compliance department to prevent individual business units from behaving badly?
Dimon is betting that the answer is no. Rather than respond to the legal losses by trimming the sails of the bank, he is doubling down on the idea that with enough personnel and technology devoted to ensuring legal compliance, the problem can be solved. JPMorgan has added 3,000 workers in its compliance area this year, Dimon said in a memo to employees last month, and has upped its spending on technology-related compliance by $1 billion. "Never before have we focused so much time, effort, brainpower, technological power and money on a single, enterprise-wide objective,” he wrote in the memo. “Make no mistake — we are going to get this right.”
One risk of this approach is that it succeeds too well, and business units around the world become so cautious and cowed by the compliance department that more nimble firms eat their lunch. The opposite risk is that no matter how many compliance officers you hire or how many billions you pour into tech systems, far-flung executives will always push to the outer limits of the law, laying the groundwork for future lawsuits and prosecutions, anyway.
Jamie Dimon has been seen as the country's leading banker for the way he maneuvered JPMorgan through the crisis. But maneuvering it through the post-crisis legal landscape may be a bigger and harder job yet.