JPMorgan, one of the biggest investment banks in the world, has agreed to pay $4.5bn back to 21 major institutional investors who lost money on mortgage-related securities during the financial crisis. The deal is separate from the preliminary $13 billion settlement which resolved a raft of actions over mortgage-backed securities. The securities in question were supposed to be sophisticated ‘risk-free home loans’, however JP Morgan is alleged to have sold the mortgage-backed assets knowing full well of the risks involved. Recent legal costs have meant that JPMorgan have made a rare loss in this years third quarter, however the estimated share price of $60 has remained intact due to the large amount of cash they have set aside to cover these settlements ($23bn). Despite this massive reserve, the bank is still under investigation and if continued legal action is to be taken, JPMorgan could see its earnings further plummet, as well as its share price. As a result of its recent multibillion-dollar trading losses, JPMorgan’s $6bn share repurchasing program (which initially sent share prices to close at their lowest level since last year) was suspended after just 2 months. However, shareholders need not worry as dividend payouts of 30 cents a quarter are set to remain unchanged, unless losses rise to $5bn (instead of the current $2bn). JPMorgan seem to have escaped a potential disaster, however future legal investigations could increase losses further, and as a result send share prices plummeting. In my opinion, the stock buyback scheme should continue as it will enable the bank to improve shareholder value, which would offset potential future depletion of their share price due to further possible legal action.
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