A number of financial institutions have been under fire for their activities both prior to and during the 2008 recession. J.P. Morgan (JPM), one of the most prestigious and highly regarded of these institutions, became the target of an intensive investigation by the Justice Department for wrongdoing regarding mortgage-backed securities. As a result of their findings, the company has agreed to a number of settlements with parties who suffered losses
JP Morgan Woes
The company's current problems stems largely from financial decisions made in the past. J.P. Morgan purchased Washington Mutual and two key players in the mortgage crisis that involved providing mortgages to unqualified applicants and securitizing the holdings for sale to investors. This led to cascading financial problems as billions of dollars in real estate value disappeared overnight.
As the financial pain spread through the economy, public advocacy groups began to demand a thorough investigation of the practices of the financial institutions involved in the mortgage holdings. J.P. Morgan was one of the most prominent names on the list, leaving itself open to a flurry of legal suits. The company reported $23 billion in its legal reserves at the end of the quarter, which is fast disappearing as news reports emerge. Though some claim the constant investigations of the company have a strong smell of political motivation, the fact remains that many institutions were involved in reckless practices in past years, and they are being called to account by both the public and the current administration.
The most notable news regarding the company recently was a potential $13 billion settlement with the U.S. Department for Justice for engaging in misleading practices in regard to mortgage-based investments, making it one of the largest fines ever paid to the government. The $13 billion represents as much as 17 percent of J.P. Morgan's 2012 U.S. revenues and 130 times CEO Jamie Dimon's compensation from 2008 to 2012. Reuters reports that as much as $4 billion of this may be tax deductible, which would whittle the payout down to a net $9 billion. However, the possibility of deducting certain costs is still under negotiation with the government. The latest of these settlements has triggered some conjecture about whether Dimon can effectively lead the company through this legal morass to a more profitable future. See
The Current Payout to Neuberger and Blackrock
The most recent announcement covers negotiations over a settlement for an expected $6 billion dollars to institutional investors who sustained losses from mortgage-backed securities. Neuberger Berman and BlackRock (BLK) are among the over a dozen investment groups representing bondholders that suspect they were deceived into backing ineligible mortgages.
Whether JP Morgan can continuing absorbing these payouts remains to be seen. The company may be "too big to whine" and may once again thrive in the future despite the current run of legal losses. See
These large settlements may be the cost of doing business in this highly charged political environment. The question of illegal actions is becoming less of a problem than whether JP Morgan and others have become so large that they cannot be adequately managed within the regulatory limitations that are currently in place.
For the near term, investors should consider avoiding the larger banks like JPM and focus their financial sector allocations of dividend paying regional Banks like PNC Financial (PNC) and Berkshire Hills (BHLB).