Is Another "Whale" in the Works After J.P. Morgan Emails on Bad Mortgages?

Michael Teague |

Last week, J.P. Morgan & Co. (JPM) surpassed Wells Fargo (WFC) to become the most valuable bank in America by market cap. The firm was the poster child of what Wall Street should like after the financial crisis era. But that pristine reputation has been called into question on numerous occasions.

During the last few years, JPM has struggled with several high-profile scandals that have cost it dearly in terms of on its balance sheet as well as its public image. The “London Whale” affair of last year is perhaps the best-known and most recent of these. One of the company’s top traders from its London office, Bruno Iksil, had been making enormous bets on debt markets. When these bets became disturbingly large, Iksil began to warn his superiors about the potential for a disaster, but was told to press on anyway.

The story is ongoing, with the results of a congressional investigation pending, the details will probably take a while to unfold. What we do know is that when the story first broke mid-way through last year, JPM’s C.E.O. Jamie Dimon famously dismissed initial reports as a “tempest in a teapot” before the bank went on to lose some $6.2 billion dollars. He has since seen his pay cut by 50 percent (to $11.5 million), and has more or less backtracked on his initial dismissal and accepted responsibility.

The “London Whale” affair comes on the heels of the crash in 2008, in the run-up to which the bank is alleged to have, to some extent at least, knowingly bundled toxic mortgages into complex securities, in order to make them seem more attractive to investors.

In fact, on the very same day that JPM took over the top spot, a new trove of emails surfaced indicating that employees of the bank were indeed well aware of the unscrupulous mortgage practices that lead to many people losing their homes. It will take some time for these emails to be properly sifted and contextualized in order to assess what actual information they contain, but they have already rekindled the type of controversy the bank was hoping it was done with for the time being.

Dimon’s appearances before congressional committees, his pay cut, and subsequent promises to keep trading activities in-line with current and upcoming federal regulations notwithstanding, it would seem as though he and the bank he runs is still going to have much more work to do to improve its public image.  In the meantime, negative press has not conflicted with the bank’s ability to capitalize on a generally improved economic climate in the U.S., particularly with positive recent trends in terms of consumer, business, and mortgage lending, as well as cheap credit.

With a 2012 fourth-quarter earnings report indicating a 53 percent per-share increase in earnings from the year before (from $0.90 to $1.39, and beating analyst expectations by $.020 on the way), it seems as though J.P. Morgan is set for yet another strong performance in 2013, regardless what the public thinks.

But there are some rather large variables that are still undecided, such as the continued recovery of the economy (particularly the housing market).  Another variable, however, may well turn out to be what substantial information is contained in this newest release of emails, as this could undermine the legitimacy of the company’s performance and business practices subsequent to the crash in 2008, and catalyze the type of outrage that could very well be taken seriously by the folks in Washington D.C.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


Symbol Name Price Change % Volume
ESLT Elbit Systems Ltd. 96.75 0.05 0.05 6,303
JPM JP Morgan Chase 68.49 0.23 0.34 12,175,674
WFC Wells Fargo & Company 45.09 0.16 0.36 21,490,816


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