Jamie Dimon, JPMorgan Chase & Co Inc's hard-charging chief executive, looked a bit more vulnerable on Friday after the bank took a $7.2 billion hit from litigation expenses and posted its first quarterly loss since 2004.
The loss is a blow to Dimon, who has long used the bank's steady profit as a shield to ward off critics of its mounting regulatory and legal issues. The bank for the first time said it has stockpiled reserves of $23 billion for expected settlements and other legal expenses.
In unusually humble language for a CEO once lionized on Wall Street and in Washington, Dimon said that the first loss under his leadership was "very painful for me personally."
JPMorgan reported a loss of $380 million, or 17 cents per share, for the third quarter. A year earlier it posted a profit of $5.71 billion, or $1.40 a share.
Dimon earned widespread praise as a risk manager for avoiding most of the mortgage-related losses that hobbled rivals during the financial crisis. But he was less adept at anticipating legal expenses.
"His halo is a little off-kilter at this point," said Jordan Posner, a senior portfolio manager at Matrix Asset Advisors of New York, which owns over 600,000 JPMorgan shares.
The third-quarter legal hit includes money set aside for future settlements. Dimon cautioned that these expenses will likely be elevated for the next year or two.
"I wish we could reduce the uncertainty for investors, but we 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 federal government."
Even putting litigation aside, revenue fell and other results were lukewarm. Weak fixed-income markets squeezed revenue at JPMorgan's investment bank, off 2 percent from a year ago and down 17 percent from the second quarter, reflecting the tough environment for bond-trading at all Wall Street banks.
Equity markets revenue gained 20 percent. Rivals such as Goldman Sachs Group Inc and Morgan Stanley, both due to report earnings next week, tend to be more heavily weighted in fixed income.
"HIT FROM ALL SIDES"
JPMorgan executives have long been quick to point out the bank's profitability when investors bring up its troubles. The bank posted record profits last year, even as bad derivatives bets known as the "London whale" trades resulted in $6 billion of losses.
But the third-quarter loss underscores how legal problems threaten the profitability of a bank that has long boasted of a "fortress" balance sheet.
Dimon "has become a little bit less critical, a little bit less vocal, a little bit more humble," said Shannon Stemm, a stock analyst at brokerage Edward Jones. "He used to run the bank that really stood out for weathering the crisis better than others."
The bank's legal issues are legion. JPMorgan faces more than a dozen probes globally, including whether it fraudulently sold U.S. mortgage securities and whether it improperly fixed certain benchmark borrowing rates. The Securities and Exchange Commission is investigating whether the bank violated anti-bribery laws in hiring sons and daughters of executives of Chinese state-owned companies.
The Justice Department is looking into whether bank employees obstructed justice in a power market manipulation probe by the Federal Energy Regulatory Commission that the bank settled in July for $410 million. JPMorgan neither admitted nor denied violations.
Federal prosecutors in August brought criminal charges against two former JPMorgan traders, accusing the pair of deliberately understating losses in the "Whale" scandal. The SEC received an admission of wrongdoing from the bank in a parallel civil action, a rare step for the government agency.
In September, JPMorgan tried to reach a settlement with the U.S. Department of Justice and other federal and state agencies to resolve claims against the bank over its mortgage businesses. An $11 billion settlement was discussed, according to sources familiar with the matter. Dimon went to Washington to meet with U.S. Attorney General Eric Holder on September 25, but no deal has resulted.
Much of those claims relate to mortgage bank Washington Mutual and investment bank Bear Stearns, two failing firms that JPMorgan took over in 2008.
PAYOUT SEEN SAFE
Despite the clouds, the bank's shares are up 20 percent this year and its CEO still has many fans. JPMorgan shares closed down a penny at $52.51 on Friday.
"While headlines today suggest the government is looking to slap some fines on them for business units that underwrote or securitized various products, JPMorgan is still in far better shape than any peers," said Tom Jalics, senior investment analyst at Key Private Bank. "It's not even close."
Dimon, 57, became CEO on December 31, 2005, and added the post of chairman a year later.
JPMorgan's chief financial officer, Marianne Lake, said legal expenses would not affect stock repurchase plans and that the bank "has every intention to pay our dividends."
Even beyond the litigation expenses, the third-quarter results were less than spectacular, with revenue declining 8 percent to $23.9 billion - about in line with forecasts - as fee income and lending income both fell.
JPMorgan and other U.S. banks have struggled to boost profits as loan volume has declined, interest margins have been under pressure, and fee income from debit cards and mortgages has been squeezed.
Also on Friday, Wells Fargo & Co, the largest U.S. mortgage lender, reported a 13 percent rise in third-quarter profit but saw a sharp drop in mortgage banking income as a boom in refinancings began to fade.
Mortgage banking income also declined at JPMorgan, with net revenue falling 45 percent to $2.02 billion.
(Reporting by David Henry in New York; additional reporting by Tanya Agrawal in Bangalore and Lauren Tara LaCapra in New York; Editing by John Wallace and Leslie Adler)