Most of us keep money in banks because that’s the easiest way to collect our paychecks, pay our bills and get quick access to our cash.
Some of us use banks because we think they’re safe. We trust bankers to handle our funds carefully. And so, we presume they know the value of money and will be careful with it.
Is this a fair presumption? After reading the latest on JPMorgan Chase (JPM), which spent $17.3 billion in a three-year period correcting its mistakes, I wonder if it’s just that the "too big to fail" set simply has more cash to cover its mistakes.
Where many other banks lost (multi)millions, JPM can lose billions … and still keep on going.
But with the newest multibillion-dollar hit to its bottom line, for this company with an estimated $22 billion in 2013 earnings, the question may be: For how long?
Stockholders of publicly traded companies receive annual reports. Usually the front part includes some nice photos while numbers and footnotes fill the back.
On page 325 of the JPMorgan Chase 2012 annual report, we learned this:
"During the years ended Dec. 31, 2012, 2011 and 2010, the Firm incurred $5.0 billion, $4.9 billion and $7.4 billion, respectively, of litigation expense. There is no assurance that the Firm’s litigation reserves will not need to be adjusted in the future."
These words are near the end of "Note 31 — Litigation" to the firm’s consolidated financial statements. You can read it yourself here. (Warning: The link takes you to a large PDF file and may take a minute to download.)
Most people think footnotes are little references at the bottom of a page. Not this one — note 31 begins on page 316 and consumes 10 full pages all by itself.
That’s a lot of (very) fine print!
And that’s not all.
Today Jamie Dimon, the CEO of JPMorgan Chase, spent two hours at Justice Department headquarters in Washington. He was there to discuss federal charges related to the firm’s residential mortgage-backed securities practices. Dimon reportedly met directly with U.S. Attorney General Eric Holder.
Citing unnamed knowledgeable sources, Bloomberg says JPM offered to settle these charges for somewhere between $3 billion and $4 billion. The sources say Holder rejected that offer and may want as much as $11 billion.
Why would Dimon make such a low-ball offer? One possible reason: He may need the cash to settle other expensive mistakes.
- JPM and the Federal Housing Finance Agency are discussing a separate $6 billion claim.
- Meanwhile the U.S. Attorney in Sacramento, Calif., is deciding whether to file charges for other alleged infractions.
- Last week, JPM agreed to pay $920 million to U.S. and U.K. regulators regarding derivative losses accrued by its London-based "Chief Investment Office."
Bloomberg reports that the "size of the settlement keeps changing." In other words, $11 billion could be at the high end of their negotiations … for now.
Plus, in the London matter, the actual losses were $6.2 billion; the $920 million fine was punishment for the rules broken by JPM employees in the course of racking up the losses.
I don’t mean to single out JPM or Dimon himself. To be clear, the fines and settlements won’t cost JPMorgan Chase depositors anything. Your bank account is safe from these fines.
However, I know that many of our subscribers hold positions in the stock and/or its options. And there’s a lot of money at stake here for this "big bank."
The stock still looks strong. Even after the latest news, shares rose in today’s trading and are still inching higher here in the after-market hours (currently at $52.10). The market seems to be pricing in recent events.
However, the financial collapse taught us that things can change in a flash … in either direction. So, be sure to keep a close watch on the stock, and I’ll do the same.
I’m also keeping a close eye on the other big banks. JPM’s settlement could set a precedent. The government may not have had the resources to go after millions of dollars here and there, but with billions potentially at stake if it doesn’t, it could be worth their while to pursue them.
According to its own reports, JPMorgan Chase anticipates 2013 litigation costs will run between $3.7 billion and $9.8 billion. And that is before any fines. The firm’s entire 2012 net income was $21.2 billion.
When the 2008 financial crisis killed Lehman Brothers and threatened every other large bank, pundits called JPM one of the "safer" institutions. Jamie Dimon was careful, risk-averse and someone who hired the best and avoided the worst of the "toxic waste" derivatives.
If you don’t have your own toxic waste, you can still acquire it. Dimon bought the remains of Bear Stearns. Did he get a good look inside? Much of his litigation originated under Bear Stearns.
You might wonder where all this money has gone, or will go. The answer is different in each case. Some of it is for fines paid to state and federal regulatory agencies, where it supposedly helps make your tax bill a little bit smaller. Our tax bills haven’t gone done yet in the states we live in, but we are hopeful for a little helping hand.
Some of the money goes to victims: investors who received false or misleading information when they bought mortgage bonds. The $11 billion penalty Holder wants for the MBS case supposedly includes $4 billion for "consumer relief." We are certainly hoping to get clarity on what that means for our readers.
Lawyers are also big winners. This includes lawyers on both sides. It probably took a lot of billable hours just to write that 10-page "Note 31" I quoted above!
How much money does a bank has to lose before it loses the public’s trust? As far as I can tell, the number for JPMorgan Chase is nearing "infinity."
Like the other "Too Big to Fail" institutions, JPM is effectively a government subsidiary. Who pays if it loses too much money? We all do.
Do you think JPM really is too big to fail? How do you feel about Dimon? Are the other top-five mega-banks any different? Click here and tell me.
A reader asked this question about Wednesday’s BlackBerry (BBRY) story.
Reader Mark C. says: "Any tax loss carry forward? Any write-downs in patent expenses capitalized, goodwill, etc.?"
Brad: Those are good questions, Mark, and some of the same questions we are looking into as well. The latest balance sheet shows no long-term debt, which is great. We should learn more when BlackBerry files its quarterly report tomorrow morning.
Today BlackBerry postponed the conference call that normally coincides with earnings reports. They also held back the "management discussion" portion of the report and say they will release it next week.
I’m not sure what that means. Maybe some kind of deal is in the works, or maybe they aren’t sure what to say.
Stocks had another quiet day, but at least managed to snap a five-day losing streak. Also …
- The U.S. economy grew at a 2.5% annual rate in the second quarter, according to the Commerce Department. Today’s GDP report was unchanged from the previous estimate.
- House Speaker John Boehner said today that the House is unlikely to pass an interim spending bill even if the Senate approves it.
- Boehner also said today that he doesn’t expect a government shutdown. How he will avoid one is unclear. The Speaker must think he can square a circle.
- Rudy Martin will name three stocks with remarkably consistent long-term growth in tomorrow morning’s Uncommon Wisdom Daily. You’ll be surprised who they are, so watch your inbox.
Good luck and happy investing,
Uncommon Wisdom Daily