JPMorgan Chase Raises Estimate for Legal Costs

Wednesday, November 5, 2014

JPMorgan Chase Raises Estimate for Legal Costs

NOVEMBER 3, 2014 6:29 PM

JPMorgan Chase recently added $2.4 billion to its estimate of the amount of legal costs it may face, the latest sign that investigations into the possible manipulation of the currency market are gaining momentum.

The potential increase in legal costs was disclosed Monday in a securities filing in which the bank also formally acknowledged that it was facing a criminal investigation by the Justice Department into the behavior of traders in the foreign exchange market.

JPMorgan is among more than a dozen giant banks that have been caught up in inquiries in the United States and Britain looking at whether traders buying and selling currencies colluded with one another to set certain benchmark prices in the market. Six banks — including JPMorgan — are expected to reach a settlement with British regulators this month.

The Justice Department investigation threatens more severe consequences. The New York Times reported last month that federal prosecutors were aiming to file criminal charges against at least one bank by the end of the year.

In Monday’s filing, JPMorgan said that it was “currently engaged in discussions” with the Justice Department and with regulators in the United States and Britain. “There is no assurance that such discussions will result in settlements,” the bank cautioned.

Still, JPMorgan’s higher estimate for its legal costs gives some indication of the potential effects of the currency investigations.

When JPMorgan initially announced its third-quarter earnings in October, the bank said that it had added $1.1 billion to its legal reserves, largely to resolve the foreign exchange investigation.

On Monday, the bank said that in addition to that $1.1 billion increase, it was also raising by $1.3 billion its estimate of what it may owe beyond its reserves. All told, the bank said it might need to pay as much as $5.9 billion in excess of its reserves.

Last week, Citigroup surprised investors by announcing that it was putting $600 million more in its legal reserves to deal with the foreign currency investigation. That was in addition to $950 million the bank had already put aside in the third quarter.

Unlike Citigroup, JPMorgan on Monday did not actually put aside more money for legal expenses. As a result, JPMorgan did not revise its third-quarter earnings.

Other banks in the foreign-exchange inquiries —HSBC, Deutsche Bank, Barclays, the Royal Bank of Scotland and UBS — have all recently taken large charges to cover potential legal costs.

The market for currency trading is the largest in the world, with $5 trillion exchanging hands each day. Traders from different banks are suspected of colluding to drive up the prices of particular currencies toward the end of the day to help their trading records.

The investigation into the foreign currency market grew out of a similar inquiry into the fixing of a key interest-rate benchmark, the London interbank offered rate, or Libor. A number of banks have already reached settlements in those cases.

For JPMorgan, the price-fixing cases would be the latest big legal hits the bank has absorbed. Since 2010, the bank has incurred legal expenses totaling $22.9 billion, which includes the $13 billion mortgage securities settlement it reached last year.