JPMorgan to Suffer $4B Compliance Hit in 2013: Report

NEW YORK ( TheStreet) -- JPMorgan Chase ( JPM) faces an additional $4 billion in costs this year related to the mounting regulatory challenges it faces, according to a report from The Wall Street Journal .

The additional costs will include "an additional $1.5 billion on managing risk and complying with regulations, including a 30% increase in risk-control staffing," according to the report, which cited unnamed sources. The bank is adding 5,000 employees "to clean up its risk and compliance problems," and will also add $2.5 billion to its litigation reserves, according to the report.

Investors now have some very large numbers, putting a stamp on comments made by JPMorgan Chase Chief Financial Officer Marianne Lake at a conference on Monday, when she said the bank's legal expenses for the third quarter could exceed $1.5 billion, but that it was "still finalizing" its estimate for costs associated with a "crescendo of activity in past weeks."

Lake said JPMorgan was "reacting" to the flurry of regulatory activity against it, and was setting aside additional litigation reserves, although she didn't provide an estimate of how much additional costs the company would face. "We are trying to put some of this behind us and hope that taking these reserves will go a long way towards that," she said.

Lake also said that the bank expected its mortgage origination business to see a net loss for the second half of 2013, in light of the vast reduction in industry refinancing volume as long-term interest rates rise. JPMorgan's mortgage business will also suffer from lower margins on sales of newly originated loans to Fannie Mae ( FNMA) and Freddie Mac ( FMCC), which is also a result of rising long-term rates.

Sell-side analysts earlier this week were downplaying the effect of the additional expenses even though they didn't have all the figures.

JPMorgan became a political and regulatory pincushion after CEO James Dimon in May 2012 first disclosed the "London Whale" hedge trading losses within the company's Chief Investment Office, which eventually came to at least $6.2 billion.

The company is facing about a dozen separate investigations by the Department of Justice and federal bank regulators. The bank has already entered into one large regulatory settlement this year, agreeing to "pay $410 million in penalties and disgorgement to ratepayers" to resolve civil charges of energy market manipulation by the Federal Energy Regulatory Commission.

Among the large figures being bandied about through various leaks to media outlets, the Federal Housing Finance Agency -- which regulates Fannie and Freddie -- is looking for JPMorgan to cough up $6 billion to settle claims the bank falsely claimed loans sold to government-sponsored enterprises met required underwriting standards, according to The Financial Times.

The Journal last week reported JPMorgan would completely exit student lending as part of a continuing effort to "simplify" its operations, although federal regulators' proposed leverage capital rules provide plenty of incentive for the biggest banks to focus on higher-risk, higher return businesses.

JPMorgan weathered the post-crisis environment quite well through 2012 with record earnings for three years running. But the regulatory costs are mounting, making it possible that Wells Fargo ( WFC) will jump to the head of the line as the nation's most profitable bank.

A JPMorgan Chase spokesperson said the company had no additional comment. Dimon was interviewed by the Journal, saying "Fixing our controls issues is job No. 1... This is a huge investment of people, time and money...but it will make us stronger in the long run."

JPMorgan's shares were up 0.4% in early trading, to $52.45.

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.

If you liked this article you might like

This Is the Perfect Time to Buy Dividend Stocks

This Is the Perfect Time to Buy Dividend Stocks

Citigroup Gives CEO Corbat 48% Pay Raise as Profitability Misses Goal

Citigroup Gives CEO Corbat 48% Pay Raise as Profitability Misses Goal

Worst-In-Class Goldman Sachs CEO Blankfein Gets 9% Pay Raise

Worst-In-Class Goldman Sachs CEO Blankfein Gets 9% Pay Raise

Here's One Hint That S&P 500 Stocks Are a Screaming Buy

Here's One Hint That S&P 500 Stocks Are a Screaming Buy

Bitcoin Today: Prices Rally Ahead of Chinese New Year, Moody's Weighs in on Risk

Bitcoin Today: Prices Rally Ahead of Chinese New Year, Moody's Weighs in on Risk