JP Morgan (JPM) is the first big bank to suffer a quarterly loss on account of multi-billion-dollar legal bills. It is also the most profitable bank in America (or was, up until this morning). Which means there are three possibilities here:
- The profits and the fines share a common cause: the internal behavior which produces massive profits also - eventually - has a tendency to produce massive fines.
- The profits and the fines are unrelated: it’s just unfortunate bad luck that such a well-run, profitable bank should come unstuck in this manner.
- The profits in some way caused the fines: regulators feel comfortable going after JPMorgan precisely because it has a fortress balance sheet and can easily pay the fines.
All three of these have a kernel of truth to them, I think. If you look at misbehavior like the Libor scandal or the London Whale debacle, the misconduct in question was clearly driven by traders looking to make as much money as possible. But all banks have traders looking to make as much money as possible, and most of the world’s biggest banks have been sucked in to the Libor scandal, in one way or another. And if you look at classic trading blowups, they’re pretty uncorrelated with profitability.
JPMorgan is also a little bit unlucky here, in that it’s literally paying the price for misconduct at companies (WaMu and Bear Stearns) it wasn’t managing when the misconduct took place. Few of us are going to shed any tears as a result: those two acquisitions were still wildly profitable for JPMorgan even after accounting for all the associated legal liabilities. But it is a bit of a stretch to blame Jamie Dimon personally for actions which took place at rival banks, before he bought those banks.
But it’s the third possibility which is the most intriguing. JPMorgan is hardly alone in having engaged in the kind of behavior which has produced all these fines - but it is alone in building up a $23 billion reserve against future legal costs, and spending $9.2 billion on such things in a single quarter. Were Washington Mutual and Bear Stearns really worse than Countrywide and Merrill Lynch? If not, how come it’s JPMorgan with the legal losses, and not Bank of America as well?
One theme running through the aftermath of the financial crisis is that banks have to some extent been insulated from being held accountable for their actions by fears that aggressive prosecutions could endanger America’s fragile economic recovery. We’re trying to recapitalize the banks, trying to get them to lend more; if we simply suck out all their capital in the form of fines, then that will only serve to weaken them. If that’s a real fear, and I think it probably is, in corners of Washington, then it makes sense that JPMorgan would be the biggest target of prosecutorial zeal - just because it’s the bank with the strongest balance sheet, and therefore the bank which is most capable of paying big fines.
None of which in any way excuses JPMorgan’s actions, or implies that the fines it’s suffering are any less than fully deserved. It just implies that weaker banks might also deserve such massive fines as well - and are managing to avoid them only because they have less ability to pay them.
I’m fine with this possibility. When the Obama administration was forced to decide whether or not to nationalize America’s biggest banks, it knew that one of the consequences of its ultimate choice - not to nationalize - was that it would see less upside if and when its bailout worked. So in a weird way, JPMorgan’s current legal woes are a way of it paying the US government back for all the help we gave the bank during and after the financial crisis.
Think about it this way: Let’s say you went up to Jamie Dimon during the height of the crisis, and told him that the Fed would implement an all-out flood of liquidity, and the Bush and Obama administrations would stop at nothing in their attempts to rescue the financial system, on one condition. The bargain would be this: if all those efforts worked, and JPMorgan ended up as a bank making $6 billion per quarter in profits, then at that point it would have to fully atone, with a few quarters’ profits, for its own sins and those of the banks it wanted to acquire. JPMorgan’s solvency and capital adequacy would be guaranteed: it would only face the fines if it was more than capable of paying them.
Dimon would have jumped at such a bargain, and so would any other bank CEO. (Well, maybe not Dick Fuld.) As a result, JPMorgan’s fines are entirely fair. They are deserved on a narrow basis, and they are easily within the bank’s ability to repay. The only reason for Dimon to feel hard done by, here, is if he thinks that rival banks are getting off easier than he is, just because they’ve got less money. That might be the case. But that doesn’t mean he’d be willing to trade places with them.
Disclosure: No positions.