With a full slate of controversies old and new, J.P Morgan & Chase (JPM) is facing complex, fraught times. The "London Whale" affair created one of the most long-lasting and damaging controversies confronting the embattled financial company. This affair saw the bank lose over $6 billion in complicated maneuvers that left financial regulators with unanswered questions. Two former JPM traders have already been criminally indicted for attempting to cover up the losses. Additionally, JPM itself has been accused of improper market manipulation by several different regulatory bodies. Whatever the eventual fallout from the "London whale" incident, the affair could reverberate through history as a stunning example of corporate hubris and organizational failure.
Though JPM has attempted to leave the "London whale" issue in the past, the Commodity Futures Trading Commission seems determined to continue pushing for redress in the matter. In September, JPM received official notice from the CFTC that the regulator intends to take enforcement action. To settle investigations into "London whale" irregularities, JPM already paid $1 billion to the SEC and other regulators. However, the CFTC pointedly removed itself from this settlement, apparently wishing to pursue its own unique course of retribution.
Over the past few years, Jamie Dimon has settled a fair number of investigations by paying groundbreaking fines and penalties. This time, JPM seems prepared to contest the CFTC's allegations in a court of law. Following a recent trend for financial regulators, the CFTC insists that any "London whale" settlement will require JPM to admit to market manipulation. Though the financial giant is fairly flexible when it comes to paying billions in fines, the company knows that each admission of wrongdoing increases its vulnerability to civil lawsuits. After a long summer of penitent behavior and conciliatory gestures, JPM is gearing up to defend itself as vigorously as possible. This fight with the CTFC could well turn into a long, protracted court battle with no certain outcomes. See my past article.
Interestingly, the CFTC's aggressive stance towards JPM is yet another outgrowth of 2010's far-reaching Dodd-Frank Act. Before that law's passage, regulators had to prove that traders intentionally manipulated markets in order effect sanctions. Under the new regime, regulators simply have to show that traders acted recklessly. Though Dodd-Frank gives regulators far greater power to act against JPM and other financial companies, the law doesn't specifically define what behaviors constitute recklessness. The same broad language that gives regulators latitude to act can also make it more difficult to prove wrongdoing.
Market watchers are observing closely to see how JPM stock will fare as the CFTC struggle unfolds. Up until now, the company's stock has proven surprisingly resilient, easily weathering shocks and crises that would have severely damaged most other companies.
At this point, JPM is so large and earns so much revenue that investors seem confident the financial giant can handle any number of regulatory challenges. Though JPM stock lost 3% of value three months prior to October 2013, the price was still up 17% from the first of the year. It may be finally time to take profits in a company that has a damaged CEO and a target rich company for most United States regulators, Attorney General Holder and a variety of plaintiff lawyers around the globe.
Additional disclosure: This article is neither a recommendation to buy or sell shares, and investors should always do their own research.