Nearly every business has a rainy day fund. JPMorgan Chase & Co. is preparing for a flood of biblical proportions.
Just last month, the biggest American bank by assets agreed to pay $920-million (U.S.) to resolve a series of probes into a major trading debacle. Then reports emerged that it was negotiating a massive settlement with federal prosecutors over an investigation into possible fraud in the sale of mortgage-backed securities. The potential price tag: $11-billion.
Now the bank has revealed that it foresees an even higher legal tab. JPMorgan has set aside $23-billion to deal with litigation costs, it said on Friday, the first time it has disclosed that figure. For context, that's roughly the same amount as JPMorgan's total revenues for the third quarter.
The bank put in a major chunk of the legal reserves – $9.2-billion, or $7.2-billion after taxes – during the third quarter, a move which swung the bank to its first quarterly loss in nine years.
"In this highly charged and unpredictable environment, with escalating demands and penalties from multiple government agencies, we thought it was prudent to significantly strengthen [our legal reserves]," said Jamie Dimon, the bank's chairman and chief executive, in a statement. "While we expect our litigation costs should abate and normalize over time, they may continue to be volatile over the next several quarters."
Mr. Dimon traveled to Washington, DC last month to meet with Eric Holder, the U.S. Attorney General, as part of the settlement talks. JPMorgan is under scrutiny from numerous federal agencies and in particular for the conduct of two of the banks it purchased during the financial crisis: Bear Stearns Cos. and Washington Mutual Inc. Federal prosecutors are conducting a criminal investigation into whether the bank defrauded investors in the sale of mortgage-backed securities.
Meanwhile, the message for holders of JPMorgan's stock is clear: be prepared for some very large shoes to drop in the near future.