Weirdly, JPMorgan Chase is now making money from litigation

Good times.
Good times.
Image: AP Photo/Richard Drew
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Welcome to the weird and wonderful world of bank accounting. In the third quarter, like the two others before it, JPMorgan Chase somehow made money from litigation. That is, over the first nine months of the year it has reported a negative “legal expense” worth nearly $550 million, boosting its bottom-line earnings.

The bank made a cool $6.3 billion in the three months ended in September (pdf).

In the previous five years, the world’s top investment bank (by fees) reported some $27 billion in legal costs, stemming from lawsuits and settlements for market manipulation, mortgage mis-selling, and much else besides. At the end of last year, the bank said that “several hundred” legal cases that were still looming against it could cost up to $3.6 billion. The gory details span seven pages in the bank’s latest annual report, starting on page 297.

So what gives?

CEO Jamie Dimon told shareholders recently that the legal problems dogging his bank, and big banks in general, “have been resolved or are receding.” On current evidence, he has a point—when JPMorgan closes cases in its favor, or in a less costly way than it once thought, it can reduce its legal reserves. This is reflected in various parts of a company’s accounts, including its earnings statement.

JPMorgan is tight-lipped about the details of its reversal of legal fortune, noting only the “net legal benefit reflecting some favorable developments.” Given its recent history, the bank is cautious about the future; CFO Marianne Lake said last quarter that “there’s no real way, obviously, of forecasting a run rate” for the bank’s future legal costs.

Indeed, this unusual run of legal luck may soon run out; JPMorgan faces some $200 million in fines for allegedly hiring of the children of Chinese officials in hopes of winning business from state-owned companies. The recent travails of Wells Fargo also suggest that scandals could be lurking in the retail units of big banks, and not just in the racier investment-banking divisions. For its part, JPMorgan is conducting a “deep dive” into the cross-selling of retail products, Lake said on a conference call today. “It’s impossible to have zero defects,” she said.