Financial Weekly Notes: JPMorgan, Citigroup & Morgan Stanley

It has been a rather eventful week for the U.S. equities market, with the Federal Reserve finally announcing on Wednesday that it will begin tapering its asset purchase program starting next month. ^[1] Share prices of companies across sectors jumped on the news, with the S&P 500 and Dow Jones recording record highs on Thursday. The Fed’s decision to reduce its monthly stimulus spending from $85 billion to $75 billion is good news for banks, as it signals to the market that key economic indicators are currently looking strong with a positive outlook for the future. It also removes the uncertainty that has kept investors wary about their investment decisions for nearly six months now, as the Fed detailed the idea of tapering in June (see The Fed’s Plans To Taper Asset Purchases: Good Or Bad News?).

Bank stocks in particular saw a healthy boost from the news, especially given that the Fed intends to hold interest rates at record low levels for longer. While banks’ net interest margins will remain under pressure, they should more than make up for this through strong services revenues from new business prospects that the low interest rate environment will spawn.

Below are some significant events pertaining to major banks that were witnessed over this week.

JPMorgan Chase

Diversified banking group JPMorgan Chase (NYSE:JPM) turned the tables on the FDIC earlier this week by filing a lawsuit demanding more than a billion dollars from the financial watchdog. The bank claims that the regulator should be held accountable for losses it incurred on securities issued by Washington Mutual before it acquired the failed financial giant at the peak of the economic downturn in 2008. The FDIC brokered the acquisition, and had allegedly promised to indemnify JPMorgan from losses on the mortgage-backed securities as the deal was seen as essential to infuse investor trust in the country’s financial system then.

The lawsuit comes a month after JPMorgan’s $13 billion settlement with several federal & state regulators (see Key Takeaways From JPMorgan’s Mammoth Settlement Of Legacy Mortgage Issues) You can read more about the lawsuit and its impact on JPMorgan in our article JPMorgan Takes FDIC To Court Over More Than A Billion In WaMu Losses.

See our full analysis for JPMorgan Chase

Citigroup

In the latest step taken by Citigroup (NYSE:C) to comply with the Volcker Rule, the globally diversified banking group sold its stake in private equity group Metalmark Capital earlier this week. ^[2] Metalmark has $2.5 billion in assets under management, and the move takes Citigroup closer to achieving the 3% limit the Volcker Rule applies on the bank’s use of Tier I capital in private equity and hedge funds.

The bank has kept itself busy over the last couple of years trying to cut down on non-core operating units as it continues to clean up its business model. It is still working towards complying with more stringent regulatory requirements imposed on financial giants by regulators in the wake of the economic downturn (see Citigroup Looks To Wind Down Another Alternative Investment Fund).

See our full analysis for Citigroup’s stock

Morgan Stanley

With a federal judge ruling that investors can sue top executives and companies directly involved in the botched Facebook (Nasdaq:FB) IPO, Morgan Stanley (NYSE:MS) is staring at a multi-million dollar lawsuit from disgruntled Facebook investors. ^[3] As the lead underwriter of the botched IPO, Morgan Stanley drew a lot of criticism for over-pricing the social networking giant’s share price. To make things worse, a  technical glitch in Nasdaq’s system resulted in investors losing millions on the day of the IPO – May 18, 2012.

Facebook had recruited a long list of banks to assist in the IPO. While Morgan Stanley took the coveted lead left position, JPMorgan and Goldman Sachs were the other main underwriters who worked with at least eight other co-managers including Citigroup, Barclays and RBC. But legal action against the other banks is expected to be limited compared to that against Morgan Stanley.

See our full analysis for Morgan Stanley

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1. Federal Reserve issues FOMC statement, Dec 18 2013 [↩]
2. Citigroup Divests Metalmark Stake to Comply With Volcker, Bloomberg, Dec 16 2013 [↩]
3. Facebook, Zuckerberg, banks must face IPO lawsuit: judge, Reuters, Dec 18 2012 [↩]