Big Banks Have Big Problems
12:00 AM, Oct 12, 2013 • By IRWIN M. STELZER
The fourth source of long-run strain on big bank profits is and will continue to be the cost of defending law suits and of legal settlements. When Jamie Dimon, chairman and CEO of JPMorgan Chase, who now realizes he made a serious error when, was told that his London traders had run up some losses, he mistook that whale for a minnow and called it a tempest in a teapot. To borrow from Winston Churchill’s “some chicken, some neck” 1941 speech in Ottawa, some tempest, some teapot. The firm lost some $6 billion on those unauthorized and undiscovered trades, and eventually agreed to a fine of almost $1 billion.
That fine is small change compared to what JPMorgan now faces. The bank set aside more than $9 billion for litigation and settlement costs in the third quarter, more than wiping out all of JPMorgan’s earnings. Result: a loss of $380 million. Dimon, seeking what he calls “a fair and reasonable settlement,” met with Attorney General Eric Holder and offered to pay some $11 billion to settle cases related to his bank’s sales of mortgage-backed securities by Bear Stearns and Washington Mutual before they were acquired by JPMorgan. He had to swallow hard since Dimon acquired these failing enterprises in response to urgent pleas from the government, convinced that the failure of those companies would threaten the entire financial system. Gratitude is not in long supply in Washington, where no good deed goes unpunished.
There is an irony in Dimon’s visit to Holder. In 1901, when President Teddy Roosevelt sued to break up a railroad monopoly erected by J. P. Morgan, the great financier, hied to the White House and told the president, “If we have done anything wrong, send your man to my man and they can fix it up.” Fast forward 112 years and JPMorgan Chase sends its man to see the president’s man to try to fix it up. So far, no dice.
JPMorgan is not the only bank setting aside billions to cover legal costs and settlements. Whether the proliferation of these actions is a result of closer regulation to reduce the possibility of another financial meltdown, or of plaintiff and government lawyers following bank robber Willie Sutton’s example – he robs banks, he said, because that is where the money is – we do not know. But we do know that big banks face earnings pressures that won’t go away. Or worse: critics, including Sandy Weill, the creator of the Citigroup conglomerate, are saying that not only are the big banks too big to fail, they are too complex and diversified to manage and to regulate, and would remain so even if the Volcker Rule is finally promulgates. Best to break them up.
But Fed governor Tarullo thinks he can effectively regulate these banks. Yellen will have to decide whether he can, or to take Weill’s advice, throw in the sponge, and opt for break-ups.
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