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JP Morgan losses bring bank’s era of exceptionalism to resounding halt

October 12, 2013


JP Morgan CEO Jamie Dimon pauses during a US Senate hearing.

Source of Report: The Guardian, Heidi Moore

America’s strongest bank has posted its first quarterly loss since 2004 in what could be a new phase of reckoning on Wall Street

The reaper has come for America’s strongest bank.

JP Morgan, the bank that sailed elegantly through the financial crisis with no scratches, just announced its first quarterly loss since 2004. That nine-year winning streak of outrageously good profits is a prize for any bank. But for JP Morgan, that winning streak is over. JP Morgan is showing its mortality as the same plagues that took down its rivals – litigation, regulation, falling profits – finally circle around to the one bank that seemed immune from trouble.

The lesson is clear: on Wall Street, there are no heroes. Consequences, long delayed, are being visited on the financial sector for its abuses, and JP Morgan’s bad quarter is the first really tangible evidence of that.

JP Morgan reported a loss of $380m for the last three months, largely because the bank is taking a hit for a tsunami of mortgage lawsuits and fines that are coming at the bank soon. It has been reported that JP Morgan is facing a historic $11bn fine for various alleged mortgage abuses committed by two banks it bought during the financial crisis: Bear Stearns and Washington Mutual.

Jamie Dimon, the CEO of JP Morgan Chase, met with US attorney general Eric Holder on Thursday and added on Friday that the bank is likely to pay even more in fines and on lawsuits soon, meaning that this loss is the beginning, and not the end. It’s also no real surprise: in 2012, Dimon said a wave of mortgage litigation was coming at the bank.

It is a timely lesson for Chase to pay a high price for alleged mortgage abuses just as the bank starts a new push into the mortgage market, trying to draw more customers and loosening its lending standards. Chase customers will have found emails declaring “Chase has low mortgage rates! Prequalify today” and promising a cash-back bonus of around $500 every year for the life of a new mortgage if customers have the payment automatically deducted from their banking accounts. JP Morgan is now, like its rivals did long ago, looking for mortgage customers in a bigger way. The fees could be high, but then so could the price the bank may pay again.

The new mortgage push and the fine for old mortgage abuses – not committed by JP Morgan, but by the banks it acquired – present a rare moment in financial history. This ends the exceptionalism of JP Morgan, America’s most profitable bank. It shows that banks, as people thought, work pretty much the same: they are commodity businesses, churning out products like loans and mortgages on an assembly line, for slim profit margins. There is no glamor in this work. It is, essentially, a financial utility. The attempts to make it an inordinately profitable business usually means lowering standards, which can backfire in a wave of losses and fines, as they have now.

To call JP Morgan a glorified utility is something of a heresy in financial circles. JP Morgan, for years, turned in profits – not just solid profits, but often spectacular ones. It did so with Teflon with ease even as it hurdled obstacles that would have destroyed weaker banks.

Consider: in 2009, when rivals like Bank of America and Citigroup were still struggling with government bailouts, a financial crisis hangover and foreclosure headaches, JP Morgan earned $11.7bn and was blithely boosting the pay of its employees. In 2010, when litigation around the Bernard Madoff Ponzi scheme was hovering around JP Morgan, the bank earned $17.4bn and awarded its CEO, Jamie Dimon, $17.4m in stock.

In 2011, when the European debt crisis was wreaking havoc with US and international rivals alike, JP Morgan earned even more: clocking in with $19bn for the year and awarding Dimon a bonus of $23m. In 2012, despite the London Whale losses of around $6bn weighing on the bank, it again turned in record – even “triumphant” – profits of $24bn, although Dimon’s pay was halved to around $11m as a scold for the scandal. During all this time, Citigroup couldn’t even make enough money to get permission from federal regulators in order to pay a simple dividend to its shareholders. Bank of America has rarely been out of the government’s crosshairs.

In other words, the steady upward march of JP Morgan profits defied history and probability alike. It offered the bank a steely armor of invincibility and created a mythos of exceptionalism. It was foolish to believe in that exceptionalism, both for anyone at the bank and anyone outside it.

With this new loss, and the ones that are likely to follow, it’s evident that JP Morgan’s victory lap for the past four years was a significant Wall Street anomaly. Wall Street traditionally moves in lockstep, with similar same profits and losses; if any poppy gets too tall, it doesn’t mean it has found the secret of growth, but only that it has temporarily avoided the reckoning that has to be inevitable. Lehman Brothers, too, was once one of Wall Street’s best success stories. During the financial crisis, Goldman Sachs and Morgan Stanley, long considered the two top investment banks in history, came close to staring death in the face. No one is exempt forever.

Perhaps this seems dire. But the fact that JP Morgan is conforming to the same troubles the rest of the financial industry has suffered shows that Wall Street is entering a new phase of reckoning. It’s not a sweeping, biblical deluge of consequences, the one called for by Occupy Wall Street and the millions of underwater or foreclosed homeowners.

Instead, it’s a slow coming to account. After the financial crisis, large banks survived and even thrived on a variety of government subsidies: direct bank bailouts like Tarp or the Federal Reserve’s series of tireless measures to make lending cheaper. These subsidies – representing “the implicit backing of the government,” as economist Simon Johnson put it – made it significantly, measurably cheaper for big banks to do business. Small banks resented it, but the government persisted.

Now those subsidies are fading somewhat. (Johnson argues that it’s not nearly enough.) Banks are struggling a little more to make money. JP Morgan’s revenues are not growing as fast as they were. Citigroup has reportedly started warning investors of an upcoming 10% dip in its trading revenues because of a rout in bonds.

In addition, the government that once supported these banks is being forced to look out for itself. The Department of Justice and others like the Federal Housing Finance Administration are pressing lawsuits against the banks after years of delays.

The result is that banks are being forced to stand on their own, very slowly. At the time, they are being brought to account for mortgage abuses – again, very slowly and in nowhere the kind of scale of the abuses themselves.

JP Morgan had a great run, when it could avoid questions by turning in profits. Then 2013 came around. Invincibility ends when profitability does. No longer shielded by a thick armor of record profits, JP Morgan is suddenly truly vulnerable to criticism, which it has muted, from shareholders.

If the bank is wise, it will listen and show both humility and clear evidence of what it plans to change – and those changes, like its fines, should be big.


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