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Regulatory squeeze – JP Morgan sees rare loss after setting aside $9.2bn in legal fees

As if any reminder was needed of the impact that increased regulation and the continuing fallout from the financial crisis is having on the banking community JP Morgan on Friday (11 October) reported a $380m third quarter loss after setting aside $9.2bn to cover its legal fees.

The results are the first quarterly loss for the bank in eight years, with chairman and CEO Jamie Dimon claiming that its ‘strong underlying performance’ this term was ‘marred by large legal expense.’

JP Morgan last reported a quarterly loss in 2004, also as a result of legal expenses, in that case related to WorldCom and Enron.

The latest results follow a sustained period of turbulence for the New York-based bank including litigation and government investigations into a wide range of issues such as the $6bn losses from its derivatives trader Bruno Iksil, more widely known as the ‘London Whale’, sales of mortgage securities, commodities trading and credit card debt collections.

However, much of the liabilities arise out of the rescue of Bear and WaMu and the US government is perceived to have tightened its stance on pursuing the misdeeds of those banks.

Dimon added: ‘We continuously evaluate our legal reserves, but in this highly charged and unpredictable environment, with escalating demands and penalties from multiple government agencies, we thought it was prudent to significantly strengthen them. While we expect our litigation costs should abate and normalize over time, they may continue to be volatile over the next several quarters.’

The announcement follows the departure in August of Michael Coyne, JP Morgan’s co-head of litigation responsible for all of the bank’s litigation and government investigations, who left the bank for San Francisco lender UnionBanCal Corp.

Nonetheless, banks including JP Morgan have been ramping up their internal litigation and compliance capability – last year former Sullivan & Cromwell litigator Stacey Friedman joined to head up a legal team as general counsel of the corporate and investment bank division and the bank is reported to be rapidly bulking up its compliance function. However, once investigations develop they are often extremely labour intensive and their ‘break the bank’ nature often means only the best, most expensive firms are used.

US firms to have assisted JP Morgan with regulatory work include Sullivan & Cromwell and Paul, Weiss, Rifkind, Wharton & Garrison, while Magic Circle firm Freshfields Bruckhaus Deringer is acting against the former supervisor of trader Bruno Iksil over the $6bn losses incurred by the bank.