JPMorgan posts first loss since 2004, a blow to Dimon

Reuters

By David Henry

Oct 11 (Reuters) - Jamie Dimon, JPMorgan Chase & Co Inc's hard-charging chief executive, looked a bit morevulnerable on Friday after the bank took a $7.2 billion hit fromlitigation expenses and posted its first quarterly loss since2004.

The loss is a blow to Dimon, who has long used the bank'ssteady profit as a shield to ward off critics of its mountingregulatory and legal issues. The bank for the first time said ithas stockpiled reserves of $23 billion for expected settlementsand other legal expenses.

In unusually humble language for a CEO once lionized on WallStreet and in Washington, Dimon said that the first loss underhis leadership was "very painful for me personally."

JPMorgan reported a loss of $380 million, or 17 cents pershare, for the third quarter. A year earlier it posted a profitof $5.71 billion, or $1.40 a share.

Dimon earned widespread praise as a risk manager foravoiding most of the mortgage-related losses that hobbled rivalsduring the financial crisis. But he was less adept atanticipating legal expenses.

"His halo is a little off-kilter at this point," said JordanPosner, a senior portfolio manager at Matrix Asset Advisors ofNew York, which owns over 600,000 JPMorgan shares.

The third-quarter legal hit includes money set aside forfuture settlements. Dimon cautioned that these expenses willlikely be elevated for the next year or two.

"I wish we could reduce the uncertainty for investors, butwe can't," he told reporters in a conference call.

Later, in a conference call with investors, he said it is"very hard to fight with your regulators and the federalgovernment."

Even putting litigation aside, revenue fell and otherresults were lukewarm. Weak fixed-income markets squeezedrevenue at JPMorgan's investment bank, off 2 percent from a yearago and down 17 percent from the second quarter, reflecting thetough environment for bond-trading at all Wall Street banks.

Equity markets revenue gained 20 percent. Rivals such asGoldman Sachs Group Inc and Morgan Stanley, bothdue to report earnings next week, tend to be more heavilyweighted in fixed income.

"HIT FROM ALL SIDES"

JPMorgan executives have long been quick to point out thebank's profitability when investors bring up its troubles. Thebank posted record profits last year, even as bad derivativesbets known as the "London whale" trades resulted in $6 billionof losses.

But the third-quarter loss underscores how legal problemsthreaten the profitability of a bank that has long boasted of a"fortress" balance sheet.

Dimon "has become a little bit less critical, a little bitless vocal, a little bit more humble," said Shannon Stemm, astock analyst at brokerage Edward Jones. "He used to run thebank that really stood out for weathering the crisis better thanothers."

The bank's legal issues are legion. JPMorgan faces more thana dozen probes globally, including whether it fraudulently soldU.S. mortgage securities and whether it improperly fixed certainbenchmark borrowing rates. The Securities and ExchangeCommission is investigating whether the bank violatedanti-bribery laws in hiring sons and daughters of executives ofChinese state-owned companies.

The Justice Department is looking into whether bankemployees obstructed justice in a power market manipulationprobe by the Federal Energy Regulatory Commission that the banksettled in July for $410 million. JPMorgan neither admitted nordenied violations.

Federal prosecutors in August brought criminal chargesagainst two former JPMorgan traders, accusing the pair ofdeliberately understating losses in the "Whale" scandal. The SECreceived an admission of wrongdoing from the bank in a parallelcivil action, a rare step for the government agency.

In September, JPMorgan tried to reach a settlement with theU.S. Department of Justice and other federal and state agenciesto resolve claims against the bank over its mortgage businesses.An $11 billion settlement was discussed, according to sourcesfamiliar with the matter. Dimon went to Washington to meet withU.S. Attorney General Eric Holder on Sept. 25, but no deal hasresulted.

Much of those claims relate to mortgage bank WashingtonMutual and investment bank Bear Stearns, two failing firms thatJPMorgan took over in 2008.

PAYOUT SEEN SAFE

Despite the clouds, the bank's shares are up 20 percent thisyear and its CEO still has many fans. JPMorgan shares closeddown a penny at $52.51 on Friday.

"While headlines today suggest the government is looking toslap some fines on them for business units that underwrote orsecuritized various products, JPMorgan is still in far bettershape than any peers," said Tom Jalics, senior investmentanalyst at Key Private Bank. "It's not even close."

Dimon, 57, became CEO on Dec. 31, 2005, and added the postof chairman a year later.

JPMorgan's chief financial officer, Marianne Lake, saidlegal expenses would not affect stock repurchase plans and thatthe bank "has every intention to pay our dividends."

Even beyond the litigation expenses, the third-quarterresults were less than spectacular, with revenue declining 8percent to $23.9 billion - about in line with forecasts - as feeincome and lending income both fell.

JPMorgan and other U.S. banks have struggled to boostprofits as loan volume has declined, interest margins have beenunder pressure, and fee income from debit cards and mortgageshas been squeezed.

Also on Friday, Wells Fargo & Co, the largest U.S.mortgage lender, reported a 13 percent rise in third-quarterprofit but saw a sharp drop in mortgage banking income as a boomin refinancings began to fade.

Mortgage banking income also declined at JPMorgan, with netrevenue falling 45 percent to $2.02 billion.

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