Regulators are putting their foot down, and JPMorgan Chase is in the hot seat. Just days before its fourth-quarter 2012 earnings release, the company was smacked with enforcement actions from several agencies, with more likely to come. Here's what happened, what JPM needs to do, and what investors should look out for.
Two major themes revealed themselves in the regulators' problems with JPMorgan: 1) its risk-management oversight and 2) its anti-money laundering standards and practices. These sanctions mark the first from regulators regarding the bank's London Whale trading debacle, where traders in London built a portfolio of complex investments that ultimately cost the company $6+ billion in losses.
The Office of the Comptroller of the Currency and the Federal Reserve issued a set of cease and desist orders that instructed the bank to remedy management oversight breakdowns that allowed London traders to rack up losses. The Federal Reserve's findings pointed to deficiencies with the bank's oversight of risk, as well as senior management's escalation of the problems to the board of directors. The OCC simply stated that the bank was engaged in "unsafe and unsound" banking practices. This comes on the heels of an internal JPM report that faulted senior management for allowing losses to add up, including CEO Jamie Dimon.
With the recent money-laundering scandal at HSBC, the Department of Justice and banking regulators have been much more focused on internal bank procedures. JPMorgan's money-laundering oversight issues didn't stem from a specific incident, according to the regulators. Instead, the enforcement action is much like the one regulators doled out on Citigroup, that focused primarily on beefing up internal procedures. While the regulators' findings for Citigroup required the bank to upgrade its transaction monitoring and internal audit procedures, JPM must improve its due diligence on customers, specifically within the bank's commercial and banking sectors. The action also stated that JPMorgan did not file all of the necessary reports on suspicious activity, which points to inadequate internal controls.
In addition to the issues discussed above, the following agencies are in the process of investigating JPMorgan's London Whale trading snafu:
Financial Services Authority (top U.K. regulator)
Securities and Exchange Commission
Commodities Futures Trading Commission
U.S. Senate Permanent Subcommittee on Investigations
Lather, rinse, repeat
Based on the enforcement actions, there are no fines or monetary penalties for JPMorgan -- yet. The regulators did leave room for that to be changed down the road. Instead, both the OCC and Federal Reserve are requiring the bank to make action plans on improvements it will make to remedy the reported shortcomings. The OCC is requiring that JPM set up a committee of at least three directors to spearhead the action plan and follow up. Both plans are due to regulators within 60 days, with the OCC calling for a follow-up report on risk management improvements within 90 days.
What to keep an eye on
Investors should pay attention to how JPM addresses the sanctions in its upcoming earnings call. While it's unlikely that the bank will cover the topic extensively, they may give a hint as to its direction with the sanctioned action plans. While the current enforcement actions may just be the first chapter in JPM's interactions with regulators, investors shouldn't be worried yet. But be sure to keep an ear to the ground for news on the other investigations and their outcomes.
Regardless of their legal troubles, big finance firms are still trading at deep discounts to their historic norms. Investors everywhere are wondering if this is the new normal, or whether finance stocks are just a screaming buy today. The answer depends on the company, so to help figure out whether JPMorgan is a buy today, I invite you to read our premium research report on the company today. Click here now for instant access!
The article This Bank Just Got Slapped By Regulators -- Should You Be Worried? originally appeared on Fool.com.
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