JP Morgan Chase (JPM) is in trouble. Not financial trouble, they are in trouble the way a schoolchild might be. They have been deemed to be naughty boys and seem to be spending as much time sitting outside the principal’s office as getting on with their work. The business itself, however, is solid, so recent weakness in the stock may well present an opportunity for buyers.
There is a lot of suspicion that CEO Jamie Dimon’s vocal opposition to the Dodd Frank financial reform bill has led to them being targeted by regulators. Call me an idealist, but I don’t believe government bodies generally operate out of spite. What can happen, though, is that vocal opposition to increased regulation can lead to those responsible for that oversight wondering what you are so worried about.
Having made a living in a trading room for most of my working life, I am well aware that if a regulator starts looking for corner cutting or rule bending at a large financial institution, the chances are they will find it.
The fact is that no matter how hard senior management may try to adopt a culture of compliance, individuals at the sharp end will do questionable things. As an old foreign exchange guy, allegations of market manipulation make me smile in a wry kind of way. Moving markets by the power of your name and the size of your positions always was, and presumably still is, the goal of a trader at a big name. It is the reward you get for being a market maker and providing liquidity when the little guys are on the run. You can legislate all you like, but as long as markets exist, size will equal power and that power will sometimes be used to control a market and, to some extent, to manipulate prices.
I am not condoning any rule breaking that may have occurred, and I understand that manipulation of energy prices could have hurt millions of consumers. I am just observing that there is a reason these kinds of stories keep coming up at big banks around the globe. A trader’s performance is judged solely on the bottom line and until somebody finds a way of changing that, the “scandals” will continue.
The regulatory issues have contributed to a significant slide in the stock price this month. JPM has dropped 13.4% from the high achieved on July 24th.
Part of this is due to bonds losing value and mortgage business slowing as talk of tapering continues, but a comparison with rival Bank of America (BAC) shows that JPM has been hit disproportionately hard. BAC has lost only 4.5% from a high achieved a day earlier than JPM’s.
Ironically, go back a year or two and it was BAC that was seen as the bad boy. They had issues relating to their purchases of Countrywide and Merrill Lynch that left them mired in the courtroom. Investors seem to have moved past those concerns, as the right hand chart above would indicate.
The way back from a credit crisis as large as that in 08-09 is a slow and often bumpy road for big banks. Both BAC and JPM have negotiated it thus far and if you step back, it is easy to imagine looking back in several years and wondering at the low valuations we continue to see.
In the case of JPM, however, mine is more of a short term view. Once again, the market has reacted quickly to the smell of trouble and may well have over-reacted. History tells us that, should JPM be found guilty of any misdeeds, the most likely outcome will amount to no more than a slap on the wrist in the grand scheme of things. Given that, buying JPM while the forward P/E ratio is around 8.5 makes far more sense than buying BAC, for example, with a P/E approaching 12.
JP Morgan Chase’s trading, investment banking and wealth management arms will continue to churn out profits, even as the market focuses on the recent bad news. Now that the initial drop has happened, it is likely that the attention will return to that fact and by the time Q3 earnings are released on October 11th, those that didn’t buy at these levels will be kicking themselves.