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Jamie Dimon's To-Do List Grows as CEO Tries to Resolve Regulatory, Legal Issues at JPMorgan

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If 2013 was Dimon's "most painful" year, 2014 may not be much better.

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Jamie Dimon may have believed that when he closed the doors on the financial crisis of 2007 and 2008, his toughest days as CEO of JPMorgan Chase (NYSE:JPM) were behind him. If he thought that, he was wrong.

Dimon admitted in a lengthy annual letter to shareholders this year that trying to resolve the multiple regulatory and legal problems his bank faced in 2013 related to everything from the London Whale trading losses to allegations of troubling mortgage practices was the "most painful, difficult and nerve-wracking experience that I have ever dealt with professionally."

That "to do" list had become a long one over the last few years, as JPMorgan Chase and Dimon have come to displace Goldman Sachs (NYSE:GS) and CEO Lloyd Blankfein as the financial institution most Americans love to hate -- the symbol of everything that is still wrong with Wall Street. Still, up until last Thursday, it seemed as if 2014 might be the year in which Dimon could finally put all that behind him and concentrate on rebuilding the bank's rather tattered image.

Now it looks as if repairing all that damage is going to have to wait. With the release of JPMorgan's first-quarter earnings, it became clear that Dimon is going to have to devote the next several months to figuring out a way to pacify not only the regulators and the public but also some restive shareholders, convincing them that he has a strategy for dealing with what appears to be a never-ending series of business woes.

Going into the earnings announcement early Friday morning, investors and analysts were reasonably upbeat. After all, the bank's previous quarterly profits and revenues had beaten expectations, in spite of some significant headwinds to core businesses (principally mortgage lending) and significant charges settling outstanding regulatory issues. Dimon had also (investors hoped) closed the door on some problem areas, announcing the sale of the bank's physical commodity business and convincing the Fed that its capital plans are solid, clearing the way for a dividend increase.

Instead, the first-quarter numbers came up short. Very short, as a matter of fact. Analysts had been expecting JPMorgan to post earnings of about $1.41 a share, but the bank's actual figure was only $1.28 a share, down 19% from year-earlier levels. Revenues were 8% lower, at $23.9 billion. Before the stock had even formally opened for trading, it was down 3.6%, and stayed lower throughout the day, pulling down not only other banking stocks, but the rest of the market.

The market-wide shadow that JPMorgan Chase's big earnings "miss" cast is an overreaction, but the sell-off in the bank's stock isn't. In a press release, Dimon noted that the bank has "growing confidence" in the US economy. But it's going to take more than confidence to pull the bank forward.

The timing couldn't be worse for JPMorgan. It has just finished forking over a string of enormous settlements to regulators: $13 billion to the Justice Department, Fannie Mae, and Freddie Mac to resolve mortgage-backed securities allegations; $4.5 billion to investors in some flawed mortgage-backed securities; billions more to deal with problems stemming from governance issues linked to Bernie Madoff; nearly a billion to address regulatory issue arising from the London Whale losses (not to mention the $6 billion in trading losses themselves).

The total topped $20 billion, while litigation expenses soared. Now that those issues are at an end, the bank is emerging into a hostile environment.

Fixed income trading is in the doldrums, dampened by risk aversion on the part of investors. So is mortgage underwriting: Loan originations were only $17 billion, down 68% from year-earlier levels and 27% below fourth-quarter levels. There isn't much more left that the bank can move from the loan loss reserve column and book as profits, as it has been doing in recent quarters.

The question is how much of the revenues are gone forever, as new regulations lead banks to back away from businesses that once were cash cows, or make those businesses more costly to operate. Certainly, it is getting tougher for banks to operate as profitably as they once did.
It's intriguing to note that Citigroup (NYSE:C), which did manage to beat analysts' earnings forecasts, is also the bank that only last month was singled out by the Federal Reserve as having failed one of its "stress tests." Citigroup failed to persuade the Fed that its capital plan was adequate, due to what the regulatory body called "qualitative concerns" about the caliber of its business oversight. (Translation: The Fed worried that Citi was at above-average risk for a "London Whale" style event of its own, and one that would wreak havoc on the bank's balance sheet.)

None of this is good news for banks. If they aren't facing economic or regulatory headwinds, they are battling business and financial problems.
Nor is any of this likely to change in the coming months, especially for the three big "capital markets" banks: JPMorgan Chase, Citigroup, and Bank of America (NYSE:BAC). Each faces the same set of pressures: The need to control costs, deal with increased regulatory oversight, and cope with the downturn in trading activity and the volatility in the IPO market, which had been a bright spot until recently.

The sell-off in JPMorgan doesn't feel like an opportunity to snap up the stock at a bargain. None of these problems are new, and Jamie Dimon doesn't seem to have devised any new ways to address them.

The only one of the biggest banks that stands out slightly from the crowd is Wells Fargo (NYSE:WFC). Oddly enough, it trades at roughly the same valuation as JPMorgan -- 12.2 times trailing earnings vs. 12.6 times earnings, although its price to book ratio is at a 50% premium -- but its business model is more geared to areas likely to do well for the foreseeable future, or at least those unlikely to run into trouble. Both banks saw their personal and business lending rise and mortgage lending fall, but Wells Fargo isn't exposed to capital markets activity, so that's one less headwind it must face.

That may make Wells relatively alluring -- but pay attention to that word, relatively. To keep its mortgage business humming, the bank has cut the minimum credit score required to qualify for an FHA loan.

It's starting to sound worryingly familiar. If you can't make money because the momentum -- the markets, the regulatory climate, the interest rate environment, etc. -- is in your favor, you take on more risk. And we all know how that story ends.
 
Editor's Note: This article by Suzanne McGee originally appeared on The Fiscal Times.

For more from The Fiscal Times:

Why Citi's Flunked Stress Test Is So Troubling

Bank of America Must Refund $727M to Customers

Americans Are So Over Bank Branches
 

Follow The Fiscal Times on Twitter @TheFiscalTimes.
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