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JPMorgan Finally to Resolve Madoff Role

NEW YORK (TheStreet) -- JPMorgan Chase (JPM - Get Report) may finalize a settlement with regulators over its role in the Bernard Madoff affair, as early as Tuesday, according to reports in the Wall Street Journal and The New York Times.

According to the reports, JPMorgan will pay over $2 billion to the Department of Justice, the Office of the Comptroller of the Currency and the Financial Crimes Enforcement Network, for failing to warn regulators of Madoff's suspicious activity.

Madoff in 2009 was sentenced to 150 years in prison for running a Ponzi scheme through his asset management business, resulting in an estimated $18 billion in losses to investors.

According to the Journal, one of the main concerns of federal prosecutors was that JPMorgan Chase didn't file Suspicious Activity Reports with the OCC, the primary regulator of its U.S. bank subsidiaries, "despite filing such a document with authorities in the U.K."

After surprising investors with a third-quarter net loss, driven by $9.15 billion in provisions for litigation reserves, JPMorgan during the fourth quarter entered into $17.5 billion in mortgage-related settlements with the Justice Department, other government authorities and institutional investors.  It was a "kitchen-sink" fourth quarter, and JPMorgan CEO James Dimon said during a presentation on Dec. 11 mentioned Madoff while discussing the company's decision to make so many settlements, rather than fight, according to a transcript provided by Thomson Reuters.

If a big bank chooses a legal fight against the Justice Department and regulators, "You will be in court for two, three, four or five years. Your people will be interviewed, your company will be demeaned in the press nonstop," Dimon said.  "So you may have paid a premium to settle," he added.

Dimon went on to say that JPMorgan's residential mortgage-backed securities settlement "was a far better thing to do. It's very hard to go to court in some of these matters if you are a banker. And I don't want to threaten the health of my Company ever."

Despite beginning 2014 with yet another settlement, while still facing additional regulatory investigations, including its role in the LIBOR scandal and multiple investigations of possible foreign exchange manipulation by many large banks, it appears the bulk of JPMorgan's litigation costs are behind it.

But the stock is still among the cheapest of all U.S. bank stocks, on a forward price-to-earnings basis.

JPMorgan's shares closed at $58.66 Friday.  The stock returned 37% during 2013, following a 36% return during 2012.  The shares trade for 9.2 times the consensus 2015 earnings estimate of $6.36, among analysts polled by Thomson Reuters.  The consensus 2014 EPS estimate is $5.99.

The following chart shows the performance of JPMorgan Chase's stock over the past five years, slightly ahead of the KBW Bank Index (I:BKX), while outperforming the S&P 500 (^GSPC), as large-cap banks have recovered from the credit crisis:

JPM Chart
JPM data by YCharts



- - Written by Philip van Doorn in Jupiter, Fla.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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