Arrests and fines over the London Whale may make little difference to JP Morgan

Dimon still has reasons to smile.
Dimon still has reasons to smile.
Image: AP Photo/Jacquelyn Martin
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(Update (Aug. 14): The two former JP Morgan employees have now been charged, according to reports.)

There is a world of regulatory hurt facing JP Morgan. Two former bank employees could be arrested this week on criminal charges related to the $6.2 billion trading loss JP Morgan racked up last year in what is known as the London Whale incident. The bank is also facing fines and civil charges from other government agencies. But in the long term, it’s unclear if the problems JP Morgan is facing now will really hurt the bank or just be a blip in its history.

The fines could amount to hundreds of millions of dollars. JP Morgan’s net income in the second quarter of this year rose by more than 30% to $6.5 billion. Higher interest rates in the coming months could have a bigger impact than the fines do; in JP Morgan’s mortgage business, they caused income to fall by 14%, around $170 million, just in the second quarter of this year.

So far, the former staffers who could face criminal charges for the London Whale are mid- and low-level employees. (Bruno Iksil, the trader who actually lost the bank the money, won’t face charges because he’s cooperating with investigators.) That’s similar to the rank of Fabrice Tourre, the former vice president at Goldman Sachs who was recently found liable by a jury for a subprime mortgage-backed securities investment that failed. Some high-ranking executives have left JP Morgan, but so far, it doesn’t look like any will be charged for lax management—as hedge fund manager Steve Cohen recently was, as part of an insider-trading case against his firm.

Probably the most important effect on JP Morgan is on its reputation. The bank and its CEO, Jamie Dimon, had come out of the financial crisis the strongest, and Dimon used his bully pulpit to lobby against increased regulation. He is definitely taking a more contrite tone these days. But he beat back an effort to take away his chairman position because of the London Whale scandal, and is still viewed as a strong CEO.

It’s not that the London Whale and other mishaps won’t have any impact on JP Morgan. In some ways the bank has become the new Goldman Sachs: It’s now the favorite target of regulators, politicians, and the press. But Goldman Sachs isn’t down and out either, and reported that its profit more than doubled in the second quarter. As long as the banks are making money, their suffering may only be temporary.