Federal Leak Machine Continues to Harass JPMorgan Chase

NEW YORK ( TheStreet) -- The shameless leaking by federal regulators concerning investigations and lawsuits against JPMorgan Chase ( JPM) is bound to continue, but there's ultimately a silver lining for investors.

The New York Times DealBook Tuesday night reported that the Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau (CFPB) were preparing enforcement actions against JPMorgan Chase over the sale of "credit protection" products to credit card customers.

According to the report, which cited unnamed sources, "the bank will have to acknowledge internal flaws and dole out at least $80 million in fines."

Another set of coming enforcement actions will focus on JPMorgan Chase's efforts to collect from delinquent credit card borrowers, through lawsuits filed from 2009 to 2011. These actions may not result in fines, according to the report.

The leak on Tuesday night followed a coordinated leak Tuesday afternoon, that the Federal Housing Finance Agency was seeking a $6 billion settlement of a mortgage putback lawsuit against JPMorgan Chase.

The FHFA regulates Fannie Mae ( FNMA) and Freddie Mac ( FMCC), which continue to purchase the vast majority of mortgage loans originated in the U.S., after both companies were taken under government conservatorship in 2008. The FHFA sued JPMorgan and 17 other banks in 2011, claiming the banks had misrepresented the quality of mortgage loans sold to the two mortgage giants.

The regulatory actions over the attempts to sell identity-theft protection services to JPMorgan Chase's credit card customers are similar to those faced by Capital One ( COF) in July 2012, when ordered by the CFPB to pay $210 million in fines and customer refunds over third-party efforts to sell "credit protection" products to its credit card customers.

The $80 million figure in DealBook's latest report on JPMorgan Chase is a drop in the bucket for the nation's largest bank, which managed to book its third-straight record annual profit of $21.3 billion, or $5.20 a share, during 2012, despite taking at least $6.2 billion in losses from the "London Whale" hedge trading debacle.

Speaking of the "London Whale," the Department of Justice may have felt left out of the federal leak fest. The Wall Street Journal -- citing "people close to the situation" -- on Wednesday reported that JPMorgan could be facing penalties of $500 million to $600 million as part of a settlement with the Justice Department, the Securities and Exchange Commission, the OCC, the Commodity Futures Trading Commission and U.K. authorities.

Of course, the $6 billion figure for the FHFA lawsuit may be far higher than the ultimate settlement amount, but when factoring in the possible fines for a "London Whale" settlement, the CFPB settlement and the $410 million in penalties and "disgorgement to ratepayers" the bank agreed to pay in its July to settle the Federal Energy Regulatory Commission's charges of energy market manipulation, JPMorgan is facing a major hit to earnings this year.

And there could be plenty of additional pain, since the bank in its second-quarter 10-Q filing said it was facing six separate DoJ investigations, along with four investigations by the SEC and three by the Commodity Futures Trading Commission.

The bank last week decided to temporarily stop adding new foreign correspondent banking relationships, in order to ease its compliance burden, according to an internal memo cited by the Wall Street Journal.

It would appear that even JPMorgan's own employees are getting in on the leak game.

As part of extracting their pound of flesh from JPMorgan, the federal agencies can be expected to continue leaking like a sieve. The idea is to get the maximum number of headlines for every single event.

This can mean leaking an investigation, leaking an investigation's conclusion, leaking a lawsuit or regulatory action before taking the action and announcing it publicly, leaking information about settlement negotiations and of course, leaking the settlement before it's publicly announced. This example, with seven separate steps all leading to headlines, can include a high-profile press conference for the action and another for the settlement, which for lead attorneys for the Justice Department can serve to increase face time and name recognition. Those can be very useful when furthering political careers.

So what does this mean for JPMorgan Chase, which performed so well in the aftermath of the credit crisis?

It could mean plenty of additional pressure for the stock over the next year.

Rafferty Capital Markets analyst Richard Bove on Monday cut his rating on the bank to "hold" from "buy," while lowering his price target for the shares to $57 from $60. Bove cited "clear risks to company earnings as a consequence of the government vendetta" against the company.

JPMorgan's shares are already the cheapest among the "big four" U.S. banks, based on forward P/E ratios, The shares closed at $50.60 Tuesday and traded for 8.3 times the consensus 2014 earnings estimate of $6.11 a share, among analysts polled by Thomson Reuters.
  • Shares of Bank of America (BAC) closed at $14.11 Tuesday and traded for 10.4 times the consensus 2014 EPS estimate of $1.36.
  • Wells Fargo closed at $41.11 Tuesday and traded for $10.2 times the consensus 2014 EPS estimate of $4.02.
  • Citigroup closed Tuesday at $48.24 and traded for 8.8 times the consensus 2014 EPS estimate of $5.46.

Among the big four, only Wells Fargo has had higher returns on assets and common equity than JPMorgan over the past several years. The regulatory and political onslaught against JPMorgan Chase at this late stage of the banking industry's recovery is clearly weighing on the shares, and depending on how fines affect this years' bottom line, the bank may have to pull back on plans for a dividend increase or share buybacks when it submits its next annual capital plan to the Federal Reserve as part of the 2014 stress tests in March.

This could present quite an opportunity for patient investors who have faith in CEO James Dimon's ability to steer JPMorgan through the continued stream of federal investigations, regulatory actions and fines. The stock has a very low valuation on a historical basis and there's no denying that JPMorgan knows how to make a lot of money.

JPM Chart JPM data by YCharts

Interested in more on JPMorgan Chase? See TheStreet Ratings' report card for this stock.

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

>Contact by Email.

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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