JPMorgan Settles London Whale & Credit Card Mis-Selling For $1.3 Billion
JPMorgan Chase (NYSE:JPM) announced two major settlements with financial regulators on September 19, with the diversified banking group footing a bill of $1.3 billion to finally draw to a close the issues raised by the Chief Investment Office (CIO) trading incident as well as those stemming from its improper credit card practices in the recent past. [1]
The settlement into the much publicized CIO trading loss – better known as the “London Whale” loss – was reached after months of detailed investigations by U.S. and U.K. financial watchdogs and an equally long period of negotiations at the end of which, the bank admitted its fault and agreed to pay $920 million in fines even as it continues to strengthen its risk-control systems. Also under investigation from regulators over wrongly billing customers for credit-monitoring services, the bank settled these charges by agreeing to refund $309 million to the affected credit card customers and paying a fine of $80 million while pledging to improve its collection process across businesses. [2]
The impact of the settlements will be seen on JPMorgan’s performance figures for this quarter, with the income statement being hit by the $1.3 billion in charges.
We stick to our $60 price estimate for JPMorgan’s stock, which is about 10% ahead of its current market price.
See our complete analysis of JPMorgan Chase here
Ever since JPMorgan revealed last May that an extra-large sized hedging arrangement by its London-based Chief Investment Office (CIO) is staring at losses worth billions of dollars, the banking giant has been under fire from regulators and investors for inadequate audit and control measures in its high-risk divisions which could undermine its entire business. Estimates for losses from the CIO investment continued to be revised upwards for a couple of months – starting from $2 billion initially (see JPMorgan’s $2 Billion Hedging Loss Hits The Entire Banking Industry) to finally settle at $6.2 billion by the time the portfolio was liquidated in Q3 2012.
The incident triggered investigations into JPMorgan’s operations by the U.S. Securities and Exchange Commission (SEC), the Federal Reserve, the Office of the Comptroller of the Currency (OCC) and the U.K. Financial Conduct Authority (FCA). All these investigations have finally been put to rest with the bank admitting to its mistake and agreeing to shell out a hefty $920 million penalty for the debacle. It must be mentioned here that the settlement does not include continuing investigations into several JPMorgan ex-employees over the London Whale losses. [3] But it definitely caps the bank’s liability in the entire mess.
The impact of the settlement will reflect in JPMorgan’s performance figures as a one-time reduction in operating margins for the bank’s Corporate & Private Equity division which houses the CIO.
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Notes:- JPMorgan Chase reaches settlements with SEC, FCA, OCC and Federal Reserve on CIO trading matter, JPMorgan Press Releases, Sept 19 2013 [↩]
- Chase Improves Collections Processes Across Businesses, JPMorgan Press Releases, Sept 19 2013 [↩]
- J.P. Morgan Faces a Hard-Line SEC, The Wall Street Journal, Sept 19 2013 [↩]