JPMorgan: Foreign Corrupt Practices Act Nonsense Loser (Update 2)

Updated from 2:53 p.m. ET with market close information and comment from Rafferty Capital Markets analyst Richard Bove.

NEW YORK ( TheStreet) -- JPMorgan Chase ( JPM) was the loser among major U.S. banks on Monday, with shares down 3% to close at $51.83.

The broad indices all ended lower on a day with no major economic reports scheduled. Investors are looking ahead to Wednesday's release of the minutes from the Federal Open Market Committee's meeting in July, for clues on when the Federal Reserve might lower its monthly bond purchases.

Another major Federal Reserve event is the annual conference in Jackson Hole, Wyo., Aug. 22 to 24. According to KBW analyst Brian Gardner, "Given the lack of a keynote speech by Fed officials at Jackson Hole, the minutes will probably be the more significant of the two events this week as the markets search for further clues on the timing as well as the composition of tapering of large scale asset purchases."

Janet Yellen -- vice chairwoman of the Federal Reserve Board and considered the frontrunner by many to succeed Federal Reserve Chairman Ben Bernanke next year -- will not be giving a speech at the Jackson Hole Conference. However, she will moderate a panel discussion on Friday. " W e expect every word she utters to be dissected," Gardner wrote in a note to clients on Friday.

With reports last week showing a significant increase in housing starts and a continued decline in first-time unemployment claims, investors are increasingly concerned over a major change in Federal Reserve policy. The central bank has been expanding its balance sheet through net monthly purchases of $40 billion in long-term agency mortgage-backed securities and $45 billion in long-term U.S. Treasury bonds since last September.

The market yield on 10-year U.S. Treasury Bonds rose 27 basis points last week, and was up another five basis points early Monday afternoon to a two-year high of 2.88%. The 10-year yield has risen from 1.70% at the end of April, as investors have anticipated a tapering of Fed bond purchases.

KBW Bank Index ( I:BKX) down 1.3% to close at 63.85, with all but 24 index components showing afternoon declines except for Commerce Bancshares ( CBSH), which was up slightly to close at $44.99.

JPMorgan Chase

JPMorgan's shares dipped Monday after a weekend report in the New York Times DealBook said the company was facing a civil investigation by the Securities and Exchange Commission over the bank's hiring practices in China.

"Citing a confidential United States government document," DealBook said "Federal authorities have opened a bribery investigation into whether JPMorgan chase hired the children of powerful Chinese officials to help the bank win lucrative business."

According to the report, "in one instance, the bank hired the son of a former Chinese banking regulator who is now the chairman of the China Everbright Group." Following the hiring, JPMorgan "secured multiple coveted assignments from the Chinese conglomerate," the report said.

DealBook was careful to say that "legal experts note that there is nothing inherently illicit about hiring well-connected people"

No kidding. That's how it's done in the U.S., so why not in China? JPMorgan would be quite foolish to refuse considering a well-qualified job applicant, just because their parents are well connected.

This latest scrutiny of JPMorgan Chase comes under the SEC's enforcement of the Foreign Corrupt Practices Act, signed into law by President Jimmy Carter in 1977.

According to Kathleen Shanley, an analyst with the unfortunately named Gimme Credit, "One wonders why JPMorgan's activity in China is the focus, given that children of the well-connected have remarkable luck in landing plum positions in various places right here at home."

"JPM has not (as of this writing) been accused of bribery, but the timing of the news isn't great," Shanley wrote in a note Monday, referring to the criminal indictments filed last week against two of the bank's employees, in connection with the "London Whale" hedge trading losses of $6.2 billion during 2012.

Guggenheim analyst Marty Mosby says "JPMorgan is under the microscope and what I think the regulators are doing is using them as an example to make sure that all of the largest banks understand they have to be above all the boundaries that are set.

"They have to be whistle-clean in that there can be no perception they are pushing the envelope as they have in the past," he says. "In other words, site operations and risk management are more important than taking advantage of every opportunity you have in the market place.

"We think a lot of these overhand issues are setting the tone for the regulatory view of JPM and other money center banks, and are weighing on the stock price relative to where it should be, based on returns," Mosby said.

"JPM will be able to work through a lot of issues over the next 12 months, and as they emerge from under that cloud, their valuation should better reflect their current profitability and returns, instead of the headline risk that is pressuring the stock today."

JPMorgan's shares trade for for 1.3 times tangible book value, according to Thomson Reuters Bank Insight, and for 8.5 times the consensus 2014 earnings estimate of $6.10 a share. The consensus 2015 EPS estimate is $6.42.

JPMorgan was recently included among TheStreet's Cheapest Bank Stocks, based on consensus 2015 earnings estimates.

"Their return on tangible common equity exceeds their cost of equity by five percentage points," According to Mosby. "And that given that level of profitability, they should be trading at twice the premium to tangible book value that they do today," he says.

Mosby rates JPMorgan Chase a "buy," with a price target of $66.00.

Rafferty Capital Markets analyst Richard Bove colorfully described the SEC's leak about the investigation of JPMorgan's hiring practices in China as "part of the program" with the agency "acting on orders" from above. "In fact, it is believed that there are 8 U.S. government agencies seeking ways to harm that company along with some states and even two foreign governments," Bove wrote in a note on Monday.

Taking the SEC's apparent selective application of the Corrupt Foreign Practices Act to JPMorgan, Bove took the matter to its logical, albeit ludicrous, conclusion.

" I f the SEC pursues an action against the bank here and prevails, it will be establishing a standard that all American companies will not be allowed to hire the most educated and best trained people in any emerging country outside the United States. If the SEC prevails it would make it necessary for that entity to investigate hundreds of companies operating outside the United States and thousands operating in this country," he wrote.

Bove added, "everyone knows that the SEC is not about to do that"

Bove rates JPMorgan a "buy," with a price target of $62.50.

JPM Chart JPM data by YCharts

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

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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.