The real risk at JPMorgan isn't its legal mess

The bank faces criminal charges and other regulatory woes, but one question rises above all the headlines.

By The Fiscal Times Aug 21, 2013 10:31AM
The Fiscal Times

By Suzanne McGee

Remember that scene in Casablanca when Claude Rains, playing Captain Renault in the World War II-era city of the title, closing down Rick's casino with the immortal words, "I'm shocked, shocked to find that gambling is going on in here," even as he gratefully pockets his own winnings?

Well, welcome to the Wall Street circa 2013. JPMorgan Chase (JPM) seems to be mired in a perfect regulatory storm, with some of its European traders facing criminal charges in connection with the London Whale losses; its commodities operations still faced with uncertainty as its aluminum warehouse storage "scandal" continues; and now the "revelation" that the bank hired the children of top Chinese officials in hopes that this would help it win more business. (It may even have worked -- surprise, surprise. Odds are, though, that the nepotism scandal will prove to be a non-starter on the regulatory front: Once that can of worms is opened, it's hard to imagine where it will ever end.)

In all, The Wall Street Journal notes, the bank faces as least seven investigations by various regulators. Yet while the bank says its legal woes might -- in the worst case scenario -- add $6.8 billion in losses above its existing reserves, this isn't in and of itself a reason to flee the stock.

Set those possible losses against the bank's earnings performance, its valuation (only 8.6 times trailing earnings), its lavish 2.93% dividend yield (almost enough to put it into the Dogs of the Dow category). Then factor in that short positions by traders hoping to profit from a fall in the bank's share price have declined by nearly 5% lately, and still account for only about 1% of all shares outstanding, and you have a recipe for a rapid rebound.

What will trigger that? Who knows. But the odds certainly favor it, once the headline risks abate.

Bank sign © John Foxx, Stockbyte, Getty ImagesThe one real risk here? The bank doesn't just need to persuade investors that it takes compliance and risk management seriously, but to really, truly take compliance and risk management seriously.


In his letter to shareholders earlier this year, CEO Jamie Dimon wrote that the bank "must and will do a better job at compliance."

"Let me be perfectly clear," Dimon wrote. "These problems were our fault, and it is our job to fix them. In fact, I feel terrible that we let our regulators down. We are devoted to ensuring that our systems, practices, controls, technology and, above all, culture meet the highest standards. We want to be considered one of the best banks -- across all measures -- by our shareholders, our customers and our regulators."

Any further revelations of questionable losses or trading activity and the context in which investors view JPMorgan Chase will turn much darker -- and rightfully so. Once is a bad error of judgment; twice is unforgivable.

But most of the risks that we know the bank will face -- rising interest rates, a decline in mortgage refinancing, the need to satisfy regulators on both capital plans and an emergency liquidation strategy -- are common to all banks. What all banks don't share is JPMorgan Chase's dominant market position and the intense focus of its management team.

If you want to stay away from this stock, do so because it is mismanaging its business, failing to maximize returns or dropping the ball on risk management -- not because of headlines about litigation. Unless JPMorgan Chase has been manipulating global markets on a massive scale (of the kind I've only encountered in crime fiction), then the ongoing litigation might leave a slight but not lasting tarnish on its name that time will rapidly remove.

Suzanne McGee is a columnist at The Fiscal Times. Subscribe to The Fiscal Times' FREE newsletter.

More from The Fiscal Times

Aug 21, 2013 11:31AM
To hell with Frank-Dodd they should've reinstated Glass-Stegall banking act of 1933 which forbids banks from becoming hedge funds and investment brokers.  Old fashioned conservative banking is dead.
Aug 21, 2013 11:15AM
Don't we all just love these bankers. 
Aug 21, 2013 11:12AM
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

123 rated 1
262 rated 2
480 rated 3
651 rated 4
649 rated 5
629 rated 6
616 rated 7
496 rated 8
346 rated 9
111 rated 10

Top Picks

TAT&T Inc9



Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.