JPMorgan posts loss on $9.2 billion legal bill

Tim Mullaney | USA TODAY

JPMorgan Chase posted a $380 million third-quarter loss as the nation's largest bank set aside $9.2 billion for legal fees and settlements, admitting it had underestimated the seriousness of its problems with regulators until only a few weeks ago.

Excluding special charges, the bank said it earned $5.8 billion, or $1.42 a share, up slightly from $5.7 billion, or $1.40 a share, in the third quarter of 2012. Analysts had expected the bank to earn $1.19 a share. Revenue was $23.9 billion, down from $25.9 billion in the same quarter a year ago.

The loss was the first since CEO Jamie Dimon took his job in 2005.

"We didn't, until a few weeks ago, reasonably expect things to escalate to where they are now,'' chief financial officer Marianne Lake said on a conference call with reporters, acknowledging the size of the loss was ''far beyond'' what investors expected. "The atmosphere has become highly charged.''

Three months ago, JPMorgan had estimated that it could resolve all of its legal issues stemming from the 2008 mortgage-market collapse for $6.8 billion more than the reserves it had set aside for settlements. Even with the new $9.2 billion allowance, the bank thinks it may need $5.7 billion more to resolve all of its issues, Lake said.

The change brings JPMorgan's total reserve for legal issues to $23 billion. Adding in the $5.7 billion in possible future expenses, and the $8 billion the bank has already paid, and its total potential exposure to the 2008 financial crisis and other issues climbs to about $36.7 billion, according to the bank.

By comparison, the bank earned about $21.3 billion in 2012.

During the quarter, JPMorgan agreed to pay $920 million in fines and admitted that it failed to properly supervise traders who caused a $6 billion loss for the bank last year, an episode known as the "London whale" case.

The bank is currently in negotiations with the Justice Department for a settlement of other claims that could reach $11 billion, including $7 billion in cash and $4 billion in consumer relief. Those claims relate to the bank's handling of mortgage-backed securities.

An estimated 80% of the anticipated legal expense stems from the acquisitions of Bear Stearns and Washington Mutual during the financial crisis. The company got what looked at the time like big discounts on each institution, CreditSights analyst David Hendler wrote before JPMorgan reported.

``In a way, the full cost of the Bear Stearns and WaMu acquisitions are now being realized,'' he wrote.

CEO Jamie Dimon said the company asked regulators in 2008 for assurances it would not pursue penalties for misdeeds committed at those companies before the deals. "We weren't completely stupid,'' he said.

But no comprehensive agreement on those issues was reached at the time. Dimon said the company continues to believe it should not be liable on many of these matters, but expects to settle with regulators.

"We're going to do what's in the best interest of our shareholders, all things considered,'' he said. ``It's not a good outcome either way.''

The bank is adding 5,000 new staffers to beef up regulatory compliance in the future, Dimon said, and is "de-risking" in part by ending relationships with clients like check-cashing businesses and what it called "certain politically exposed foreign-domiciled persons.''

JPMorgan is also exiting businesses like student loan origination, identity theft protection and physical commodities trading that it says are either not essential to its business or pose too much operational risk.

Part of the cost of the new compliance culture will be made up by a reduction of about 15,000 jobs in JPMorgan's mortgage operations and branch networks this year, the company said.

JPMorgan shares initially rallied on the earnings report, climbing 2.6% in trading before the market opened. But it gave back most of those gains after New York Stock Exchange trading began.

Earnings benefited from a $1.6 billion reduction in loan loss reserves, including $1 billion reserves to protect the bank's mortgage portfolio. At the same time, the mortgage business saw profit drop 13% as loan production volume fell 67% on higher interest rates.

In the bank's major businesses:

•JPMorgan's corporate and investment bank saw net income rise 12% to $2.24 billion from $1.99 billion as revenue fell 2%.

• Consumer and community banking saw revenue drop 13% and profit climb 15%, driven by the lower mortgage volume and the reversal of loan loss reserves.

• Asset management profits rose 7% to $500 million on a 12% revenue gain.