The last thing that top executives at JPMorgan Chase & Co. wanted to talk about Wednesday was the raging foreclosure mess.
"We're not going to say too much about this today, other than the comments that we're giving you here," Chief Financial Officer Douglas Braunstein said on a conference call to discuss the company's earnings.
That was wishful thinking.
Instead, analysts and investors wanted answers from Braunstein and CEO Jamie Dimon on the rapidly escalating foreclosure fiasco, which overshadowed an otherwise strong earnings report from the nation's second-largest bank. JPMorgan's profits increased 23 percent to $4.42 billion.
JPMorgan's earnings came out on the same day that officials from all 50 states announced a joint investigation into accusations that lenders used flawed documents to foreclose on thousands of homeowners. JPMorgan, a big player in the mortgage market, said it was expanding its review of foreclosures from 23 to 41 states, and doubling the amount of cases under review to 115,000.
"We're not evicting people who deserve to stay in the house," Dimon declared. Dimon said he was hopeful that it would take three to four weeks for his bank to review the documents and get the foreclosure process back on track. However, he worried that "if it went on for a long period of time, it will have a lot of consequences, most of which would be adverse on everybody."
JPMorgan Chase's executives' reluctance to talk too much about the foreclosure crisis is understandable. The latest crisis comes just as the anger over the U.S. bailout of large banks was fading. The allegations of shoddy work and document fraud on thousands of foreclosures that led to people being evicted from their homes puts banks back again on the hot seat.
"Bank executives have been unwilling and unable to imagine the worst that could happen," says Nancy Bush, bank analyst for NAB Research. "You think you've seen the worst, and then there's worse."
Though Dimon brushed it aside, at least two analysts expressed concern over the $1.3 billion increase inJPMorgan Chase's litigation reserve to fight lawsuits, including those for mortgage-related matters.
In its third quarter, JPMorgan Chase posted a 23 percent gain in net income, mostly because it set aside less money to cover losses from bad loans. Revenues fell 15 percent to $24.3 billion in a sign that tighter regulations and a sluggish economy are taking a toll.
New York-based JPMorgan Chase & Co., the first major bank to report third-quarter results, earned $1.01 per share in the three months ending in September, beating anlaysts' expectations. It earned $3.59 billion, or 82 cents, during the same period last year.
JPMorgan Chase is the nation's No. 2 bank by assets and holds a vast portfolio of consumer and business loans, making it a bellwether for the U.S. economy. A closer look at its results suggest that the degree of suffering is starting to abate for Americans struggling through the longest recession since the 1930s. In a positive sign, JPMorgan said fewer of its customers were late on payments on mortgages and credit cards.
That enabled JPMorgan Chase to set aside $1.55 billion to cover for losses its expects from mortgages and auto loans, less than half the $3.99 billion it recorded in the same period a year ago. Similarly, the bank set aside $1.63 billion for expected losses in its credit-card business, down sharply from $4.97 billion last year.
What's worrisome for JPMorgan Chase's future earnings prospects is the fact that recently enacted financial overhaul legislation is already starting put a dent on earnings and revenue. JPMorgan may not be as able to rely as heavily as it has in recent quarters on trading profits and fees from its investment banking business to offset losses from mortgages and credit-card lending.
"JPMorgan's earnings power has decreased because of slowing investment bank trading and also slow growth in its loan book," said Benjamin Wallace, a securities analyst at Grimes & Co in Westborough, Massachusetts, which holds JPMorgan shares.
Profit from investment banking, which includes underwriting stock and bond offerings and advising corporations on deals, fell 33 percent. The drop was due mainly to lower fees from stock offerings. Income from trading currencies, bonds and other fixed-income investments fell 38 percent as interest rates remained at historic lows.