$9.15 Billion - I Wouldn't Even Pay A Lawyer To Defend Me For A Parking Ticket:
Last week, JPMorgan Chase & Co (JPM) reported an astounding $9.15 billion pre-tax legal expense for the most recent quarter, the highest ever. There is nothing wrong with Jamie Dimon defending the company, although there was another option the still employed CEO could have taken - a settlement.
Litigation Costs Do Not Go Towards A Settlement
Of course JPMorgan does not want to settle and face paying a huge bill for their lucrative, although questionable, mortgage bond selling that took place prior to the financial crisis. Even though if the company did conduct meaningful and concluding conversations with the government, a settlement would have been much cheaper than the still ongoing litigation. Keep in mind that the $9.15 billion does not go towards a settlement with the government, it goes into the bank accounts of the law firms representing the giant.
They Should Have Settled
Unconfirmed reports have surfaced that the government is seeking a $20 billion settlement, with more accurate reports putting the number at $11 billion. Yes you called it, JPMorgan could have taken the total amount they paid in legal fees, added $2 billion more and settled. Further, settlements are negotiations between parties, so the company may have had a chance to get off cheaper, around the $9 billion they paid in legal expenses.
Looking forward is where the real burn of the numbers sets in. JPMorgan will not only face higher legal expenses, although they put the amount they will have to pay in jeopardy. Speculating that JPMorgan will face half of what they paid to conclude the litigation with the government, or $4.5 billion, and that the end result would be the same $11 billion number used above, that amounts to a $24.65 billion (9.15 + 11 + 4.5) total for this debacle - roughly $3.2 billion more than the company's profits for 2012. So looking at these numbers, Jamie Dimon could have settled with the government in the $9-$11 billion range and saved the company a ton of money.
Well Dimon Can't Tell The Future!
Of course the CEO can't tell the future, but he can obviously see a mounting legal bill or the projects from his legal advisors prior to the rollout of the problem. Further, it would be not well thought for me not to include the caveats with my way of thinking:
- That Dimon had no idea of the legal fees that would be entailed.
- Settling would set the image that the company will settle when faced with any lawsuits.
It is hard for me to believe that Dimon had no idea of the legal fees that would be entailed with the litigation with the government. It seems as though if he was not in any way informed as the bill crested each incremental one billion dollar mark, that he does not have an eye over the company to begin with. Moreover, settling with the government prior to this large expanse of expenses does not set the image that the company will settle when faced with any lawsuit - it would have been a well thought out decision by Jamie Dimon. The company has a large history of litigating out many problems, and they can do so in the future if they are faced with unwarranted litigation. Settling once to save $15 billion is a smart move and is worth more than any media bias that the company will settle when faced with litigation - a defense that any party suing the company can't use when they are explaining to their bosses how they thought the company would just cave.
Of course many companies see the litigation costs they may face in the future as small in relation to the profits they would gain from taking part in a particular business opportunity, although when settling could have been cheaper than more than a year's worth of profits all the blame goes to Jamie Dimon.
Additional disclosure: This article is for informational purposes only, always contact a financial professional before executing any trades or investments.