Know The Laws, Know Your Rights: JPMorgan

In a decision made public on Monday, Justice Melvin Schweitzer of the State Supreme Court in Manhattan ordered JPMorgan to pay $42.5 million on the breach of contract claim, plus 5 percent annual interest starting in May 2008.

The judge found JPMorgan was not liable for negligence. His decision was dated Aug. 21, about seven months after the three-week, nonjury trial.

Mr. Blavatnik sued JPMorgan in 2009 to recover more than $100 million that he said the bank lost on a roughly $1 billion investment by CMMF L.L.C., a fund created by his company, Access Industries.

Separately, JPMorgan faces other litigation and investigations involving its handling of mortgage-related businesses during the financial crisis.

According to Mr. Blavatnik, JPMorgan Investment Management promised that it would invest Access’s money conservatively after opening the account in 2006.

Instead, according to Mr. Blavatnik, the bank breached a 20 percent limit for mortgage-backed securities by misclassifying securities that were backed by a pool of subprime loans, known as ABS-home equity loans, as asset-backed rather than mortgage-backed securities.

Access also accused JPMorgan of continuing to hold the troubled securities despite knowing they were inappropriate for the portfolio. CMMF closed the account in May 2008.

In finding JPMorgan liable for exceeding the 20 percent cap, Justice Schweitzer rejected the bank’s argument that “industry practice” was to classify the home equity loans separately from mortgage securities because they carried different risks.

In ruling for JPMorgan on the negligence claim, Justice Schweitzer said that the mortgage securities were considered “relatively safe and desirable” when they were bought, and that JPMorgan acted reasonably in light of current conditions when it advised CMMF to “wait out the storm” rather than sell at depressed prices.

A JPMorgan spokesman, Doug Morris, said: “We are pleased that the court rejected CMMF’s negligence claims, and found that our investment professionals lived up to their responsibilities. We respectfully disagree with the court’s interpretation of our agreement with CMMF, and we are considering our options regarding that finding.”

David Elsberg, a partner at Quinn Emanuel Urquhart & Sullivan representing Mr. Blavatnik, said: “Hopefully it signals that banks need to live up to their obligations to clients, and as the court makes clear, not hide behind what they often try to refer to as industry practice.”

Mr. Blavatnik also welcomed the decision. “There are a lot of people out there who, I understand, feel they have been wronged by JPMorgan but cannot afford to take on a huge bank. They shouldn’t have to,” he said in a statement. “JPMorgan should do the right thing because it is the right thing to do.”

Mr. Blavatnik is estimated to be worth about $16 billion, making him the world’s 44th richest person, according to Forbes magazine.

Wednesday, August 21, 2013

DealBook: Hiring in China By JPMorgan Under Scrutiny

Sunday, August 18, 2013

DealBook: Prosecutors and F.B.I. Examine JPMorgan Over Losses

Saturday, August 10, 2013

DealBook: JPMorgan Reveals It Faces Criminal and Civil Inquiries

Friday, August 9, 2013

DealBook: JPMorgan Nears Settlement on ‘London Whale’ Case

Tuesday, July 30, 2013

DealBook: Energy Regulator Details Case Against JPMorgan

Saturday, July 27, 2013

JPMorgan to Exit Physical Commodities Trading

Wall Street's biggest bank said an "internal review" had concluded it should pursue "strategic alternatives" for its physical commodities operations, which includes assets like its Henry Bath metals warehousing subsidiary and a team of physical power and oil traders in Houston and New York.

The firm will explore "a sale, spinoff or strategic partnership" for its physical arm, the statement said, adding the bank remained "fully committed" to its traditional financial commodity business, including trading derivatives and its activities in precious metals.

The bank's announcement follows a week of unprecedented scrutiny of Wall Street's commodity operations, after the U.S. Federal Reserve said last Friday it was reviewing a landmark 2003 decision that allowed commercial banks to trade in physical markets to "complement" their financial activity.

JPMorgan has also faced additional pressure from a power market manipulation scandal in California and the Midwest, with reports suggesting the bank will soon pay a near record $410 million settlement with the U.S. Federal Energy Regulatory Commission (FERC).

The Department of Justice and the U.S. Commodity Futures Trading Commission have also both launched probes into the metal warehousing businesses owned by Wall Street banks and other large physical traders, which have been accused of driving up metals prices.

The abrupt move marks a sharp reversal for the bank that had pushed aggressively into the sector since 2008, when it first acquired a host of physical trading assets and expertise through its acquisition of Bear Stearns during the financial crisis.

That was followed by the acquisition of RBS Sempra Commodities in 2010, allowing the bank to quickly challenge Goldman Sachs and Morgan Stanley for the title of largest commodity business on Wall Street.

A spokesman for JPMorgan did not immediately return a call seeking comment.

The decision will also bring questions about the next move for Blythe Masters, the architect of JPMorgan's growth in commodities and one of the most famous women on Wall Street.

JPMorgan shares were down 1 percent at $55.97 in late afternoon trading on Friday.

(Additional reporting by Jonathan Leff in New York, Avik Das and Aman Shah in Bangalore; Editing by Sriraj Kalluvila and Phil Berlowitz)

Saturday, July 13, 2013

DealBook: JPMorgan Chase Faces Questions on Potential New Capital Rules

During an earnings call on Friday, stock analysts asked JPMorgan Chase questions about how a potentially nettlesome regulation might affect the bank.

Justin Lane/European Pressphoto AgencyDuring an earnings call on Friday, stock analysts asked questions JPMorgan Chase about how a potentially nettlesome regulation might affect the bank.

It’s often the case that when someone doesn’t want to talk about something, it only invites more questions.

That’s certainly how it felt on a conference call that JPMorgan Chase held Friday to discuss its second-quarter financial results. The earnings were relatively strong. Yet for much of the call, the stock analysts who cover JPMorgan asked questions about how a potentially nettlesome regulation might affect the bank.

The bank’s chief financial officer, Marianne Lake, was willing to discuss the subject, but only up to a point. There was one number she seemed to not want to reveal. The issue relates to something called the leverage ratio, a measure of how much capital a bank has.

Since the financial crisis of 2008, regulators have been introducing new rules on capital because they feel higher capital levels makes banks more able to weather storms. That’s because capital can act as a financial cushion that absorbs losses in troubled times. To measure whether it is sufficient, capital is often expressed as a percentage of a bank’s assets. For instance, a bank with $3 in capital and $100 in assets would have a leverage ratio of 3 percent.

This week, regulators proposed a new leverage ratio rule. They want large banks to hold capital that meets a certain percentage of assets, plus other risks embedded in their balance sheets. And it measures the ratios at different places in the bank’s corporate structure.

At the parent company, the leverage ratio would effectively have to be 5 percent. Meanwhile, regulators want the ratio to be 6 percent at the banking subsidiaries that are covered by federal deposit insurance.

The banks have two months to comment on the rules, during which they are almost certainly going to request changes. Once the proposed rules are put into effect, banks will have until the end of 2017 to comply with the new leverage ratios.

On Friday, JPMorgan Chase estimated that it was already close to meeting the 5 percent requirement at its holding company, saying it had enough capital to get to a 4.7 percent leverage ratio there.

Naturally, analysts also wanted to know whether JPMorgan Chase’s deposit-gathering subsidiaries, which are far larger than the holding company, were close to meeting the 6 percent requirement.

“Do you have any sense that you could give us of where you stand on the leverage ratio at the bank level today relative to the 6 percent requirement?” John McDonald, a bank analyst at Bernstein Research, asked on Friday.

Marianne Lake, the chief financial officer at JPMorgan Chase.

Ms. Lake responded that she would not disclose the bank leverage ratio. She added that it was lower than at the holding company.

A few minutes later, Betsy Graseck, a bank analyst at Morgan Stanley, tried. “I’m just wondering why no bank-sub disclosure. I realize that is different, but — and I heard your answer earlier — but I’m just wondering,” she asked, why the number was not provided.

Ms. Lake replied, “So, Betsy, there’s nothing sinister underlying it.”

The chief financial officer did offer some hints, however.

She said the bank subsidiary leverage ratio would be “small tens of basis points” lower than the 4.7 percent level at the holding company. A basis point is a hundredth of a percentage point. Therefore, the leverage ratio for JPMorgan Chase’s bank subsidiaries might be around 4.4 percent.

Under the proposed rules, those entities would eventually have to increase their capital holdings so they are at 6 percent.

Right now, that would mean JPMorgan Chase would have to raise capital by $40 to $50 billion at the subsidiaries. Analysts at Goldman Sachs and Keefe, Bruyette & Woods estimate a shortfall of as much as $47 billion, which is a far higher theoretical dollar deficit than exists at other large banks’ insured subsidiaries.

(However, Bank of New York Mellon’s deficit is higher as a percentage of existing capital, according to Keefe, Bruyette & Woods).

A capital hole of nearly $50 billion is significant even for a bank as big and profitable as JPMorgan Chase. That may be why the bank didn’t want to go into further detail. The fact that its dollar deficit seems to dwarf that of other banks may also be a source of discomfort. For instance, Goldman analysts estimate Citigroup only falls short by $10 billion at its insured entities.

Mark Kornblau, a JPMorgan Chase spokesman, declined to add to what the bank’s executives said on the Friday call about the leverage ratio.

On that call, JPMorgan Chase executives said the bank could increase its leverage ratio at the bank subsidiaries by moving assets or unwinding derivatives, the financial contracts that generate substantial trading revenue for JPMorgan Chase (as well as some losses, as shown by the London whale debacle last year).

Indeed, if JPMorgan does end up getting hit harder by the new leverage ratio, it may not be a complete accident.

Regulators have long tolerated immense amounts of Wall Street business taking place within insured subsidiaries. But the proposed leverage ratio may be the regulators’ new way of forcing banks to hold higher capital to protect against potential trading losses in such entities.

Goldman Sachs estimates it would take JPMorgan Chase two and a half years to earn the capital it needs to plug the hypothetical gap at is subsidiaries. This matters for shareholders. Using earnings to bolster capital might restrict what the bank can pay out in dividends and spend on stock buybacks. On Friday, JPMorgan Chase’s chief executive, Jamie Dimon, said the bank could step up distributions to shareholders and meet the new leverage ratio requirements. A bank of JPMorgan Chase’s profitability probably can do both.

Still, shareholders might feel more confidence about that assertion if the bank had detailed just how much extra capital it might have to find.

DealBook: JPMorgan and Wells Fargo Feel First Chill of Rising Interest Rates

Leslye Davis/The New York TimesJPMorgan’s profit on mortgages fell 14 percent in the last quarter.

Even as two of the nation’s largest banks reported record profits on Friday, beneath the rosy earnings were signs that a sharp uptick in interest rates could spell trouble ahead for Wall Street and the broader housing market.

Kicking off bank earnings season, JPMorgan Chase and Wells Fargo handily beat analysts’ expectations. Profit at JPMorgan surged 31 percent, bolstered by gains in the bank’s trading and investment banking business. Wells Fargo, the biggest home lender in the country, posted a 19 percent increase in its second-quarter profit.

The gains were spread across the banks except for one important source: mortgage banking. The results showed that refinancing activity slowed, as did demand for mortgage loans.

The results could worsen. If rates continue to rise, fewer borrowers are likely to refinance or buy a house. And if the mortgage bond market weakens, banks will take a smaller gain when selling the mortgages.

While these concerns have loomed for months, the earnings on Friday offered the clearest picture yet of how the interest rate turmoil could affect the banks, whose fortunes hinge in part on their lending businesses.

“We’re trying to be clear with you that this would be a significant event,” Marianne Lake, JPMorgan’s chief financial officer, said on Friday, referring to the potential effect of rising rates on the industry. She cautioned analysts that the volumes of mortgage refinancing could plunge by an “estimated 30 percent to 40 percent” in the second half of this year.

The results from JPMorgan and Wells are a barometer for the housing market because the two banks together account for the majority of all mortgages in the United States. In recent years, the recovery in the market has fueled the earnings of both companies and has also played a significant role in the broader economic rebound.

John Stumpf, chief of Wells Fargo, noted that higher rates reflected a mending economy. “I’ll take that trade all day,” he said.

Mark Lennihan/Associated PressJohn Stumpf, chief of Wells Fargo, noted that higher rates reflected a mending economy. “I’ll take that trade all day,” he said.

Until now, the banks have benefited from government policies intended to stimulate the economy in the wake of the financial crisis. As the Federal Reserve cut interest rates in recent years, for example, it spurred millions of borrowers to refinance their home loans to take advantage of the lower costs.

But the Fed has signaled in recent weeks that it could ease its stimulus as the economy continues to recover. The warning has prompted investors to drive up interest rates around the globe. Since Fed officials first hinted that they might retreat, the rate for a 30-year fixed mortgage has risen to 4.78 percent from a low of 3.54 percent.

The banks’ second-quarter results show the early results of the sudden surge. In the second quarter, Wells Fargo received $146 billion worth of quarterly home loan applications, down from $208 billion in the period a year earlier. Its mortgage originations totaled $112 billion, down from $131 billion.

At JPMorgan, mortgage originations rose 12 percent in the quarter, to $49 billion, but overall profit in mortgage banking fell by 14 percent, to $1.1 billion.

On Friday, JPMorgan executives said the slowdown could be even more extreme than previous forecasts have suggested. While both banks might be able to seize on the uptick in interest rates to create a bigger spread between the income they derive from lending and the ultimate cost of borrowing, those benefits proved elusive.

Net interest margin, a critical measure that reveals how much profit banks earn on their loans, fell at JPMorgan, settling in at 2.60 percent for the quarter, from 2.83 percent in the previous quarter. At Wells Fargo, it was 3.46 percent, down from 3.48 percent in the first quarter.

The results suggested that the surge in interest rates came too late in the second quarter to significantly affect the banks, but that the increase could cause deeper problems in the second half of the year.

Christopher Whalen, an investor and housing market analyst at Carrington Investment Services, said that the numbers that Wells and JPMorgan presented were a “very big deal.”

“Everybody in the mortgage industry is going to have to reassess their view of this year and next,” Mr. Whalen said.

Rising rates, though, might help other parts of the banks’ business. Within its fixed-income trading operations, for example, JPMorgan reported an 18 percent increase in revenue. Fees in JPMorgan’s investment banking unit surged 38 percent, to $1.7 billion.

Wells Fargo executives played down the significance of the rate change, noting that mortgage rates were still extremely low by historical standards. John Stumpf, the bank’s chief executive, pointed to the interest he paid for his own mortgages.

“If you were in the mortgage market before 2000, you know that these are unbelievably good rates,” Mr. Stumpf said. “My first mortgage was at 8.5 percent. My second one was at 11.5 percent, and I thought those were great rates at those times.”

Mr. Stumpf noted that the uptick in rates stemmed from the Fed’s indication that the economy was improving. Housing prices are rising and demand for homes has soared.

As the improvements continue, he said, a growth in loans for new home purchases will more than make up for any losses in refinancing.

“I’ll take that trade all day,” Mr. Stumpf said. “It’s good for America, it’s good for the economy and in the long term, it’s good for our business.”

Wells’s overall loan portfolio, which includes commercial and consumer lending, actually rose 3 percent to $802 billion in the second quarter. A bump in credit cards and commercial lending — and record origination of auto loans — further offset the home loan slowdown. The bank’s total average deposits reached $1 trillion, up 9 percent from a year ago.

But important drivers of the returns at Wells Fargo and JPMorgan did not stem from substantial growth in the underlying businesses. Instead, they came from reduced expenses.

Wells Fargo, for example, reduced a crucial expense — building a reserve for bad loans. This move reflected improvements in the quality of loans.

In the second quarter, JPMorgan also lifted its profits by reducing loan-loss reserves by $1.5 billion. The bank defended the practice, saying it pointed to the improving condition of its loans.

Yet Jamie Dimon, JPMorgan’s chief executive, conceded that fresh loan growth was still “soft.”

Nathaniel Popper contributed reporting.

Sunday, June 16, 2013

DealBook: JPMorgan to Spin Out Its Private Equity Unit

Since taking over as chief executive, Jamie Dimon has gradually reduced JPMorgan's exposure to the risky business of buying and selling companies.

Mario Tama/Getty ImagesSince taking over as chief executive, Jamie Dimon has gradually reduced JPMorgan’s exposure to the risky business of buying and selling companies.

Jamie Dimon has long had a complicated relationship with private equity. Since taking over as chief executive of JPMorgan Chase in 2005, Mr. Dimon has gradually reduced the bank’s exposure to the risky business of buying and selling companies.

On Friday, Mr. Dimon announced that JPMorgan’s last remaining private equity unit, One Equity Partners, would be spun out into a separate company and raise its next fund as an independent firm.

The move comes as banks are facing regulatory pressure to reduce their exposure to risky businesses, but the divestment of One Equity, which manages $4.5 billion of the bank’s money, was not in response to that, according to a person briefed on the matter.

Instead, this person said, the decision is a reflection of JPMorgan’s emphasis on its client businesses rather than making investments off the firm’s balance sheet. Last year, the bank was buffeted by a multibillion-dollar trading loss by its chief investment office in London.

The One Equity business is the legacy private equity arm of Bank One, the Ohio bank that Mr. Dimon ran and sold to JPMorgan in 2004. At that time, JP Morgan had two other private equity divisions — JPMorgan Partners, a unit that made a broad range of investments, and Corsair, an arm that invested in financial services.

Mr. Dimon took over as chief executive of the combined company in 2005. That year, the bank surprised Wall Street by keeping the smaller One Equity Partners and splitting off the bigger business. JPMorgan Partners is now an independent private equity firm called CCMP, and Corsair was spun out in 2006 into an independent firm.

One of the bank’s reasons for de-emphasizing its private equity investments — especially the ones that were made by its largest unit, JPMorgan Partners — is that it didn’t want to be in businesses that directly competed with some of its prized private equity clients, like Blackstone Group and Kohlberg Kravis Roberts. JPMorgan’s investment bank has a very lucrative business both advising and making loans to the world’s largest buyout firms.

One Equity was started in 2001 by Dick Cashin, its managing partner and a former Olympic rower. Among the firm’s more successful deals were its buyout of the health care company Quintiles and its acquisition of Polaroid out of bankruptcy. Jacques Nasser, the former chief executive of the Ford Motor Company, is a One Equity senior executive. The firm will continue to manage its existing portfolio of investments for JPMorgan, and sell them off over time.

“I have worked with the team at OEP for the past 12 years and have a lot of respect for all that they have accomplished and the great value they have delivered to the firm,” Mr. Dimon said in a statement.

JPMorgan’s decision to divest itself of One Equity comes as the debate over the Volcker Rule drags on. The passage of the Dodd-Frank financial overhaul in 2010 placed restrictions on how much capital banks could invest in hard-to-sell assets like private equity.

A number of banks have jettisoned much of their buyout operations, including Bank of America and Citigroup. But with the continued uncertainty surrounding the Dodd-Frank law, others have maintained their private equity arms, like Goldman Sachs Capital Partners and Morgan Stanley Global Private Equity.