The record $13-billion (U.S.) fine that JPMorgan may pay to settle a welter of mortgage suits deepens the quandary the bank’s shareholders find themselves in. By rights, such a whopping charge ought to prompt calls for chairman and chief executive officer Jamie Dimon’s head. Add in almost $20-billion of other legal and operational missteps since 2010 – including 2012’s London Whale trading hit – and his risk-management and M&A skills look almost as bad as those of former Bank of America boss Ken Lewis.
Mr. Lewis lost his job in September, 2009, after a rash of ill-conceived acquisitions that drained cash and later, thanks to buying Countrywide and Merrill Lynch, capital – requiring a double government bailout of $45-billion and landing Mr. Lewis in legal battles over whether he lied to shareholders. His legacy has cost BofA $28-billion just to buy back dodgy mortgages before taking into account operational losses and legal costs.
Mr. Dimon’s tenure has not reached that level of red ink. The bank has set aside $28-billion since 2010 to cover potential litigation costs – almost double BofA’s tally – though loan repurchase costs are a fraction of that. Not dissimilar to BofA, much of JPMorgan’s legal exposure came from takeovers, of Bear Stearns and Washington Mutual. Granted, the federal government was desperate for a deal in both cases – but the same could be said of mr. Lewis’s crisis deals.
Being less bad than another bank, though, is no reason for a CEO to remain in the job. Merrill’s Stan O’Neal and Citigroup’s Chuck Prince were both forced out of the corner office in late 2007 after announcing mortgage losses around half JPMorgan’s tally of litigation costs. And Barclays’ Bob Diamond was given the heave-ho after a $450-million regulatory fine related to fixing Libor.
What has made Mr. Dimon more Teflon is JPMorgan’s performance. The legal reserves set aside between 2010 and 2012 cut the bank’s earnings by some 20 per cent – but still left JPMorgan earning 11-per-cent returns on equity – far better than its big-bank peers except Wells Fargo. Even with last quarter’s $340-million net loss after taking into account litigation expenses, its normalized earnings still grew 5 per cent, better than rivals.
As a consequence, JPMorgan shareholders have been willing to give Mr. Dimon a break. This latest settlement, however, will test their tolerance in ways that JPMorgan’s board must be ready to face with a proper strategy for succession.