The London Whale is playing in JPMorgan’s bonus pool.
The disastrous derivatives trade that cost the bank $6.2 billion, coupled with a barrage of regulatory fines and penalties, is expected to cut earnings — and by extension year-end bonuses.
Wall Street workers are facing lower payouts after JPMorgan agreed to pay nearly $1 billion to the Securities and Exchange and other regulators to settle the trading scandal.
The hit to the bonus pool will depend in large part on the bank’s final legal tab. Beyond the whale fine, JPMorgan is in negotiations with state and federal officials to pay as much as $11 billion to resolve a raft of mortgage-related probes and litigation.
“We don’t know what litigation expenses it has reserved for, but if the bank is adversely impacted by [litigation] charges, you’d expect to see that impact on compensation,” said Barclays bank analyst Jason Goldberg.
FBR Capital Markets estimates that JPMorgan is looking at litigation expenses of nearly $7 billion above its estimated reserved amount.
The nation’s biggest lender, led by Chairman and CEO Jamie Dimon, will kick off Wall’s Street earnings parade on Friday when it releases third-quarter results.
Sandler O’Neill analyst Jeff Harte noted that JPMorgan’s results will be weighed down by the $920 million whale penalty and other charges because they are not tax deductible.
Dimon personally took a more than 50 percent pay cut last year, dropping to $10.5 million from $21 million, as punishment for the botched trade despite record earnings.
JPMorgan, which hauled in $21.3 billion in profits in 2012, may avoid a more significant hit to its balance sheet this quarter, thanks to the expected release of hundreds of millions of reserves against losses on credit cards and mortgages.
Since the financial collapse in 2008, JPMorgan and other banks have been able to prop up results and offset waning revenue by releasing so-called loan loss reserves for mortgages and credit cards as the economy slowly improves.
Revenue growth across Wall Street remains sluggish, however, while creeping interest rates are taking their toll on the mortgage refinancing boom that propelled results even during the downturn.
JPMorgan’s investment bank may provide a slight lift. Fresh trading activity in bonds during the last few weeks of the quarter helped boost volumes as corporations rushed to take advantage of low rates.