JPM's legal troubles are not over yet.
It's no coincidence that the nation's two most stable banks lead off bank earnings on the same day, but tomorrow JPMorgan Chase and Wells Fargo will come to the plate a little bruised up.
It's not that their numbers will scare investors. Analysts expect both banks to post healthy numbers that beat last year's quarter and that fall in line with the previous quarter. JPM is expected to report revenues of $25 billion and earnings per share of $1.21 while Wells Fargo analysts are expecting earnings per share $.87 in earnings on $21 billion in revenue.
Their numbers typically set the tone for the rest of the bank earnings season but this time around both banks, which are known for their relatively clean records, will find themselves in an unusual position: Defending themselves against big recent lawsuits.
Both banks were recently hit with suits from the government. JPMorgan's suit came last week courtesy of New York Attorney General Eric Schneiderman. The AG sued the bank for fraudulent conduct he says Bear Stearns engaged in prior to JPM's purchase of the firm in 2008.
It's an interesting lawsuit considering JPM's CEO Jamie Dimon views his purchase of Bear "a favor" to the government. Yesterday during a Council on Foreign Relations event Dimon was clearly riled up about the AG's suit. He told the audience he's unsure if he'd buy Bear knowing what he knows now, and went one step further to say it's unlikely his bank would do such a favor for the government again.
Of course, it's not the first quarter Dimon and Co. will be faced with tough questions on an earnings call. It was during the second quarter when the bank's CIO office lost billions of dollars on a bad trade. During the second quarter's earnings call Dimon was fresh off off two days of testimony in Washington. He shared with investors that the loss had ballooned to nearly $6 billion from the initial $2 billion figure and as a result he announced claw-backs from executives at the bank.
The aftermath of the trading loss is not over yet. Expect Dimon to give an update tomorrow on any further losses stemming from the London Whale while likely reiterating that the incident was a stupid error.
However, some on the call might be inclined to push him on whether it was an indeed an error. This week The New York Times reports that federal investigators are looking to make arrests in the case noting that some employees may have valued the troubled bets in a favorable way. That's not quite a stupid error rather, if proven, a serious crime.
Over in San Francisco the nation's biggest mortgage lender finds itself in unfamiliar defense mode as well. Wells Fargo will report earnings before the opening bell and CEO John Stumpf will host an earnings call at 10am EST fresh off the heels of a massive mortgagee fraud suit filed against the bank.
Wells Fargo was unscathed by the '08 meltdown but now must defend itself against a mortgage fraud... [+]
On Tuesday, Manhattan U.S. Attorney Preet Bharara and the U.S. Department of Housing and Urban Development accused Wells Fargo of engaging in "longstanding and reckless trifecta of deficient training, deficient underwriting and deficient disclosure, all while relying on the convenient backstop of government insurance."
Ouch. That's got to hurt considering the allegations are aimed directly at Wells rather than the toxic entities it bought when it purchased Wachovia in 2008.
Prosecutors cite $190 million in insurance claims paid by the government on 6,320 defaulted mortgages that it alleges Wells failed to properly review and report to the FHA.
The suit may surprise some investors as it was Wells that avoided much of the subprime hoopla that toppled many of its peers. Wells is denying the allegations and says it has "acted as a prudent and responsible lender with FHA delinquency rates that have been as low as half the industry average."
Investors will want to know how badly this suit will hurt Warren Buffet's favorite bank. KBW analysts say Wells will likely settle the charges for somewhere between $104.5 million and $423.5 million--an amount that could hurt the next quarter's earnings.
Beyond the impact on immediate quarterly earnings the lawsuits are an indicator that the legal troubles facing big banks are far from over. When the so-called better banks like JPM and Wells are thrown these curve balls it's a reminder that the industry has a long way to go before litigation reserves are an after-thought during quarterly earnings calls.
