The past few years have seen an almost endless string of controversies for J.P Morgan and Chase (JPM). In a delayed aftermath to 2008's subprime mortgage crisis, the investment bank is facing civil and criminal charges for allegedly pushing questionable mortgage securities in bad faith. In past years, U.S Attorney General Eric Holder faced tremendous public criticism for failing to take JPM to task. Today, a chastened Holder seems willing to go to the distance in blaming JPM for the nation's economic woes.
On September 26, JPM CEO James Dimon was in Washington to negotiate an $11 billion settlement to end the Justice Department's investigation once and for all. This would represent the largest Justice Department fine ever levied against a single company. If the proposed settlement is finalized, it would be an uneasy compromise for both friends and foes of JPM. To supporters, the deal seems akin to extortion and denies the bank a chance to have its day in court. Meanwhile, critics of JPM would bemoan the loss of any chance to criminally convict executives who allegedly helped push the economy into crisis. Whatever one's position on JPM, it is hard to argue with the idea that criminal conviction is a far greater deterrent for wrongdoing than a fine, no matter how large.
This is certainly a difficult time for JPM as the company moves through a series of high-profile problems. Although the potential $11 billion fine is a game-changer, it only caps a string of fines and scandals. In July, the company was fined $410 million for manipulating U.S energy markets. The evolving "London whale" scandal has led to yet another fine of over $900 million. That affair has also seen two of JPM's London-based traders indicted for securities fraud in connection with covering up $6 billion in trading losses.
With so many recent and ongoing scandals at JPM, there can be little doubt that the company has fostered a reckless corporate culture that is rife with entitlement and impunity. At the same time, many are far too quick to turn financial institutions into scapegoats for natural fluctuations of the economy. Despite the best efforts of bankers and bureaucrats, no way has been found to eliminate economic cycles altogether. While proper regulatory oversight is important, governments who create chilling environments for investment banks can ultimately guide their nations into long-term stagnation.
Even for financial and legal experts, it is hard to say how JPM would fare if it had its day in court. Whatever one thinks of the investment bank, the proposed $11 billion fine has troubling implications for the future. It seems to create moral hazard by encouraging banks to engage in questionable practices--as long as they have enough cash on hand to pay levied fines. $11 billion represents less than a third of JPM's annual revenues and investors certainly seem confident about the bank's ability to weather the blow. JPM stock has risen $18 since the "London whale" scandal broke last spring. For right now, JPM is such an entrenched, powerful institution that its stock value seems almost bulletproof. Only time will tell if this will remain true in the years to come.
Additional disclosure: Investors should consult with their financial advisor before making any investment decisions.