By Morgan Smith
JPMorgan Chase (JPM) CEO went before five top banking regulators, specifically Thomas Curry, the comptroller of the Office of the Comptroller of the Currency, SEC chairman Mary Schapiro, CFTC chairman Gary Gensler, FDIC acting chairman Martin Gruenberg and Federal Reserve general counsel Scott Alvarez, regarding the ridiculously high $2 billion loss that the company experienced. While Dimon did not defend the $2 billion in losses, he did highlight JPMorgan's size, saying, "We are not too big to fail." Dimon also noted that "Banks should be bankruptable."
The company's colleagues on Wall Street do not really understand the commotion over this situation though. It seems that multiple sources believe this event has been blown out of proportion and has received too much attention lately. For example, Allen Meltzer, professor of political economy and public policy at Carnegie Mellon University, said "Is it something new, to learn banks lose money? No. Investments go bad, loans go bad, and that's no surprise. I suppose I can understand this point of view. Other large financial companies have made similar missteps in the past without receiving similar amounts of interest.
The bank's regulators have also been called into question following the loss. It is easy enough to say that the loss should not have occurred, but it is not nearly as easy to determine what will prevent similar losses in the future. We need to remember that the only reason JPMorgan is being investigated is because a risky strategy failed. Had it succeeded, we would be singing a completely different tune.
On the other hand, the bank's market share has dropped significantly since the loss. It also brings into question the issue of whether or not banks have changed their ways following the crash in 2008. JPMorgan's current situation certainly seems to indicate that they have not.
Public reaction may be exaggerated, but I think I can understand why this reaction has occurred. Many believe that JPMorgan was well aware of the risks it was taking and the potential consequences of those risks. Many further suggest that the risky methods the company used could have been avoided and even rectified. Despite the knowledge that the company had, it continued to engage in practices that eventually led to the huge loss that is now under such close scrutiny.
JPMorgan's competitors are struggling as well, making this a questionable time to invest in many of these companies.
Wells Fargo (WFC) is one of several financial institutions that has to face allegations of "fraud, conspiracy to secure an inflated appraisal and unlawful foreclosure." The companies have primarily been accused of misleading investors that were new to the market a few years ago. These investors are now experiencing losses as a result of this misleading information. Breakwater Equity Partners represents this group of investors, and they are looking for remuneration in the region of $30 million. This will be used to compensate for the attorney fees, lost profits, and lost investment. In short, things do not look good for this company or the stock at the moment.
Competitor Citigroup (C) recently announced that, despite putting forth efforts to the contrary, it will "not seek to return additional capital to shareholders" when it resubmits its capital plan. Earlier this year, the company made an attempt to increase its dividend and buy back stocks. This attempt was not approved by the Federal Reserve though. Citigroup maintains that this is not a significant problem and will not have any real effect on the company. In addition, it will not request any additional return when resubmitting the plan and will instead try again next year. I do not think this is a major problem, but I do anticipate it having a slightly negative effect on the stock.
Meanwhile, competitor Bank of America (BAC) has drawn a substantial amount of bad press from the reports that the company discriminated against a woman based on the fact that she was on maternity leave. This is an example of how an isolated event at one branch can make an impact on a bank stock and on the way the public views that bank. In order to deal with the situation, Bank of America paid $161,180 to settle these allegations of discrimination. I feel that this is something that the bank will be able to bounce back from fairly easily. It is still just one branch, and I do not expect any large drops in the stock as a result.
As things stand, it seems that JPMorgan is not the only bank struggling to maintain investor confidence. It appears that banks are largely failing investors at the moment. They seem to be unable to mend their ways and provide us with the stability we need after 2008. JPMorgan is one of the largest and most well-respected banks, so it should not be losing huge amounts of money like this. Investors in these financial stocks need to think carefully about where these companies are going. Significant changes need to take place before I would place much trust in JPMorgan stock.
That being said, I think the company will be able to eventually overcome its issues, which could be seen more as a result of bad luck than bad management. Until these events start to fade away, however, I think the stock will continue to face difficulty in the near-term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.