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JPMorgan Chase Posts Unexpected Loss, $7.2B in Legal Expenses

Stocks in this article: JPM XLF WFC

The Wall Street Journal reported late Thursday that the bank and the Department of Justice were still far from reaching an agreement.

In a presentation to investors, the bank said that in its estimate, 80% of the mortgage-backed securities losses relate to those securities sold by Washington Mutual and Bear Stearns, before they were acquired by JPMorgan in 2008.

Dimon told analysts during the conference call that the acquisitions were causing the bank pain. He said the management in 2008 had asked the SEC to not take enforcement actions against them over Bear Stearn's mistakes and the agency said it would take it into consideration. "We weren't completely stupid" about the acquisition, he said.

He added that he did not believe the bank was responsible for Washington Mutual¿s losses, by contract. That, however, "does not mean people won't come after you. So that was a bit of a lesson learned too," he said.

Still, Dimon's comments Friday suggest that the bank will not settle charges without a fight. "We're going to do what's in the best interest of our shareholders all things considered, it's a board level decision and it needs to be fair, reasonable, taking consideration all of the facts."

Management however warned that the legal expenses could be volatile. Even though it has set aside $23 billion toward litigation reserves, including the latest addition of $9.15 billion to reserves, the bank's estimate of reasonably possible legal losses in excess of reserves dropped only slightly to $5.7 billion, from $6.8 billion in the previous quarter

CFO Marianne Lake said in a media conference call that the legal expenses were much higher than the bank had anticipated but reflected "today's reality for us." She said legal expenses would be lumpy quarter to quarter but will normalize over time.

Dimon said the bank was getting closer to putting its legal problems behind it, but said that the environment remained unpredictable. "We wish we could reduce the uncertainty for investors but we can't."

He added that while the legal issues were painful, the bank's underlying performance was still strong.

JPMorgan saw revenue from consumer and community banking business decline 8% from the previous quarter and 13% from a year earlier. Lower credit losses however boosted profits by 15% year-over-year.

Net interest income was down 2% at $7.1 billion, driven by lower deposit margins and spread compression in credit card and auto loans. The bank said net interest income would be flat in the near term.

Expectedly, the bank took a hit in its mortgage production business, with refinancing volumes plunging on higher interest rates. Mortgage production revenue, excluding repurchase losses plummeted 67% from the previous year. Mortgage originations declined 14% year-over-year and 17% quarter-over-quarter to $40.5 billion.

The bank posted a mortgage pretax income of $90 million. But excluding repurchases, it posted a loss of $85 million. The bank had already warned that it was likely to see negative mortgage production pre-tax margins in the second half of the year.

JPMorgan expects to have cut 11,000 jobs by the end of the year.

The bank's fixed income trading revenue declined 8% from a year ago. September was marked with higher volatility and lower volumes as the Federal Reserve decided not to go ahead with its plan to taper bond purchases.

Equity trading revenue was however up by 20%, while investment banking fees was up 6%.

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