$11 billion! The price of JPM mortgages fraud?

Reports of JP Morgan Chase and Co. (NYSE: JPM) settling its myriad cases with the regulators and courts are pouring in – and the estimated price tag seems to be a whopping $11 billion (this is addition to the $5 billion it has spent in the last two years on litigation and another $6 billion of losses from the derivatives trades in the London Whale scandal). The settlement is supposed to have $7 billion for regulators, in cash and another $4 billion for consumers who faced the brunt of losses in the subprime meltdown from securities they were sold by JPM.

While the numbers are not final and no official announcements have been made, any figure even close to the $11 billion is definitely going to affect its stock price and its recently approved share buyback program.

The US Justice Department, the Securities and Exchange Commission (SEC), the Department of Housing and Development (HUD) and the New York State Attorney General (NYAG) are all involved in the proceeding against JPM. The case against the bank is about how it sold subprime mortgage backed securities to customers not deemed to be ‘sophisticated investors’. In the height of the crisis, JPM was considered, along with Wells Fargo (NYSE: WFC), the bank that did things right. It’s CEO, Jamie Dimon was even being considered by many as an heir to a NY Fed Chairmanship from Timothy Geithner. Dimon himself has also been very vocal about the necessity of risk management and balancing profits with the perils of taking on outsized risks. All that changed with the London Whale derivative trades, which were an obvious oversight to the tune of $6.2 billion and cast a shadow of doubt on JPM’s management for the first time from the days of the crisis.

The amazing resilience of the stock is surprising many – it was up 2.7% in yesterday’s trading and ended at $51.70. The stock is up nearly 16% year to date. We believe the faith in Dimon has waned but the markets have read within the lines – and we would urge investors to be careful before they start calculating earnings including the one-time charges and putting a multiple on it. The large mortgage related losses in JPM all come from its acquisitions of Washington Mutual and Bear Stearns. Whether those were the right ‘failed firms’ to acquire is a longer question – but it is obvious that the oversight from JPM in the swinging days of MBS was impeccable while the firms it bought, with external government support, did not have those checks in place. The markets are relieved to get a verdict (though rumored) and the ability for JPM to move on from the effects of these acquisitions.

JPM Year to Date Price

JPM is trading at an 8.10 PE (for its $6.38 EPS), which is lowest amongst its peer groups and below similar large commercial bank/investment bank conglomerates like Citigroup (NYSE: C) trading at an 11.26 PE or Bank of America (NYSE: BAC) trading at an 11.06 PE.

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