JP Morgan Chase spent more on legal bills than paying its staff in the third quarter of 2013, as the penalties and litigation costs stemming from numerous violations of industry rules outstripped the bank’s core operating functions in scope.
The country’s largest bank reported a quarterly loss of $380 million last week primarily due to having spent or set aside a total of $9.3 billion for legal costs, including settlement payouts, relating to a variety of lawsuits and government charges against the firm. At 39 percent of the company’s $23.1 billion net revenue for the quarter, legal costs were the company’s largest expense. According to the official quarterly earnings report filed with the Securities and Exchange Commission (SEC), the bank spent $7.3 billion to pay its workforce and $947 million on rent and overhead costs for its facilities around the world.
A company’s largest expense “should get at the heart of what a firm does,” as business reporter Tim Fernholz wrote last week, noting that General Motors’ biggest expense is making cars and Apple’s is sales. JP Morgan’s core functions as a commercial bank, lender, and investment powerhouse were overshadowed in this most recent earnings period by the legal costs of its high-profile errors and consumer abuses. Since 2010, the bank has committed $31 billion, or nearly half of its net earnings, to legal costs. Most of those costs come from setting aside funds in a sort of legal rainy-day fund, meaning the funds could be restored to shareholders if they do not end up being needed for settlements and litigation the bank anticipates. Actual payouts since 2010 total $8 billion.
But those payments still look paltry compared to the societal costs of the financial meltdown from which many of the settlements stem. A study from Federal Reserve of Dallas researchers this summer pegged the total economic costs of the crisis at a minimum of $6 trillion in the U.S., and possibly as much as $14 trillion. Those are just the immediate costs of the 2007-2009 economic contraction, and the study’s authors said that factoring in the slowed economic growth since the recession officially ended would push the cost estimate closer to $20 trillion.
If JP Morgan had spent the same amount it set aside for legal costs in the third quarter on helping underwater homeowners, it could have paid off more than 62,000 home loans. The $9.2 billion could have paid off the college debts of nearly 300,000 young Americans, launched nearly 500 community banks, or even pulled Detroit out of bankruptcy, among other virtuous deeds.