Colin Barr

Following the money in banking, economics, and Washington

JPMorgan's plastic explosives

June 24, 2011: 9:59 AM ET

Do we have a credit-card robosigning scandal on our hands?

A report Friday suggests that the banks' contemptible failure to maintain proper records– exposed during the foreclosure scandals of the past year – hasn't been limited to their boom-and-bust mortgage businesses.

Hear it ticking?

JPMorgan Chase (JPM) has dropped more than a thousand debt-collection suits aimed at people who defaulted on their credit cards, the Wall Street Journal reports. The decision to drop some suits in five states will cost Chase some money, but the bigger issue by far is the possibility that the banks' record-keeping failures aren't limited to their notoriously lax mortgage lines.

This could invite more regulatory scrutiny at a time when the Jamie Dimons of the world are already whimpering about how hard their lives are, liberal housing allowances and all. That means the labor-intensive back-office cleanup the banks are belatedly undertaking stands to get even costlier.

The issue here is not the money at stake in the suits JPMorgan has dropped. While the Journal notes the bank had $46 billion in credit card receivables in the five states where it has dropped suits, the actual sums involved in the cases dropped so far are likely not very meaningful to JPMorgan's bottom line.

Assuming the bank has dropped 1,000 cases against debtors with an average balance of, say, $30,000 -- twice the national average balance – the amount JPMorgan is forgoing is on the order of $30 million. That's about 12 hours' worth of profits at the first-quarter rate. Dimon could probably absorb that hit out of his own pocket without flinching, not that he's likely to.

But the story suggests that the problem probably isn't limited to these cases. That was certainly the observation in the robosigning episode, which kept getting bigger and bigger even as the banks claimed it was no big deal. And then there was that swell case where Dimon fairly thundered that JPMorgan hadn't foreclosed on any military families only to have the bank admit a couple months later that it actually, um, had. Again with the ineptitude.

So we could be looking at the tip of the credit card iceberg here. Certainly this doesn't sound like a sound banking practice:

In a federal-court lawsuit filed last year against J.P. Morgan inSan Antonio, a former assistant vice president at the bank who worked on sales of delinquent credit-card loans alleged that employees known as "attorney liaisons" signed "multiple stacks of affidavits" filed as part of credit-card lawsuits without "looking at any accounts at all."

No, of course not. They were too jammed to look at the accounts. And the honchos at JPMorgan, the supposed good guys of the U.S. banking industry, will find themselves busy backpedaling yet again.

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About This Author
Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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