Press masks world''s fiscal distress


GATA NOTE: J.P. Morgan/Chase shares fell
5.5 percent Friday, after this news story
was published.


Charges of collusion with Enron, big losses
raise questions about J.P. Morgan's judgment

By E. Scott Reckard
Los Angeles Times
February 1, 2002

In the rubble of recent financial collapses,
one prestigious institution seems especially
vulnerable: J.P. Morgan Chase & Co., the
nation's second-largest bank.

The New York company, a lead lender to Enron
Corp., Kmart Corp., and telecommunications
firm Global Crossing Ltd., is at risk of
losing billions in dealings with bankrupt
firms, as well as losing heavily in
Argentina's economic meltdown.

J.P. Morgan also lost $1.1 billion last year
on its stakes in businesses, including many
ailing technology companies, and is accused
by insurers of helping Enron conceal vast
losses. Morgan strongly disputes the charge,
but the allegation, coupled with the hefty
losses, raises questions about the judgment
of an institution that traces its roots back
more than 200 years. The bank's woes,
accompanied by sizable losses on loans at
many other financial giants, also reveal
chinks in a banking industry generally
regarded as a pillar for the nation's
recovery from an economic slowdown and from
Sept. 11.

J.P. Morgan fares badly in comparison with
big competitors such as Citigroup Inc., the
largest U.S. banking concern, and Bank of
America Inc., the third-largest. Despite
their huge losses in Argentina, Enron and
other corporate collapses, Citigroup earned
$4 billion and BofA posted a profit of $2
billion in the fourth quarter, bolstered in
part by robust consumer lending.

Morgan, by contrast, lost $332 million in the
fourth quarter, compared with a $708-million
profit a year earlier. For the year, the
company still earned $1.6 billion.

Wall Street's skittishness over projected
losses at J.P. Morgan has been apparent in
the steady stock selloff in recent weeks
after a "parade of train wrecks," in the
words of analyst E. Reilly Tierney at Fox-
Pitt Kelton in New York.

The stock, which traded above $40 early in
December, hovered near $32 this week before
closing Thursday at $34.05, up 99 cents a
share, on the New York Stock Exchange.

Some analysts remain bullish on Morgan,
saying the institution is fundamentally sound
and the financial setbacks are only
temporary. And by some industry measures,
J.P. Morgan's financials look sturdy. A key
ratio of nonperforming assets to total
assets, for example, was just 0.87 percent as
of Dec. 31, well below the 2 percent figure
regarded as a sign of potential trouble.

Investors' concerns surfaced in December
after Enron's bankruptcy, when J.P. Morgan,
which had a reputation for usually disclosing
bad news promptly and completely, suddenly
tripled its estimate of its potential Enron
losses, to $2.6 billion.

Nearly $1 billion of the total stemmed from
insurers' refusals to pay Enron-related
claims on unfulfilled energy contracts. The
insurers contended in a lawsuit filed in
federal court in New York that the losses
resulted from J.P. Morgan's setting up "sham"
offshore energy trading concerns to do
business with Enron.

J.P. Morgan contends its energy trading
companies were above-board, adding that --
unlike Enron -- it included the results on
its balance sheets.

The bank also says the hefty loan losses from
the mammoth bankruptcies are a result of J.P.
Morgan's position as the leading arranger of
the biggest credit lines to the biggest
businesses. These so-called syndicated loans
are carved up and shared by dozens of banks.

"We're handling 40 percent of the syndicated
loans, and when companies go down we tend to
be exposed," said J.P. Morgan spokeswoman
Kristin Lemkau.

But other banks in the syndicates typically
take on responsibility for more than 90
percent of the amounts lent. Though J.P.
Morgan arranged $1.6 billion in credit lines
for Kmart, for example, it had just $117
million in unsecured loans when the retailer
filed for bankruptcy last month. Likewise,
though J.P. Morgan had helped arrange $2.25
billion in loans for Global Crossing, it's
now owed less than $100 million by the
telecom firm, according to people close to
the situation. And while J.P. Morgan still
has a $500-million exposure to Argentina,
Citigroup and FleetBoston have far more.

Indeed, only about 10 percent of J.P.
Morgan's earnings come from lending these
days, compared with 50 percent a decade ago,
Lemkau said, meaning its comparative credit
risk exposure actually has declined

Still, there's no denying the bank's
missteps, which include an 8 percent stake in
an Argentine bank accused of fraud, and loans
to a European cable TV company that has
threatened to default on $17.5 billion in

Prospects looked far brighter at the end of
2000, when J.P. Morgan Chase & Co. emerged in
its current manifestation via the colossal
merger of Chase Manhattan Corp. and J.P.
Morgan & Co.

After deregulation tore down walls separating
banks, brokerages, and insurers, the idea was
to compete better with Citigroup -- itself
formed in the merger of Citicorp and
Travelers Group -- by selling more services
to clients. The newly formed giant hoped
especially to persuade companies with bank
loans to use J.P. Morgan's investment banking
services, which typically are more profitable
than commercial lending.

But the technology meltdown, the recession,
and Sept. 11 combined to create the worst
environment in years for stock offerings,
mergers and other staples of investment

The big question now, Tierney said, is
whether J.P. Morgan failed to assess credit
risks properly at companies because it
figured making loans was a sure path to
bigger profit on other services.

However, Lemkau said the dollar amount of
corporate loans on J.P. Morgan's books has
declined for the last three years. "It's a
misconception we're lending like a drunken
sailor so we can get our hand on more
profitable businesses," she said. "It's just
not true."

No doubt reflecting the uncertainties facing
all financial institutions after Sept. 11 and
the Enron meltdown, the range of expert
opinions about Morgan is astonishingly wide.

Some analysts, such as Michael Mayo at
Prudential Financial, have slapped "sell"
ratings on the bank while others, such as
Diana P. Yates at A.G. Edwards & Sons Inc.,
rate it a "strong buy."

Yates characterized concerns over the
insurers' allegations of collusion with Enron
as "overdone." She also warned against
judging J.P. Morgan by its admittedly
atrocious last quarter.

"They're taking some hits, but they're a big
company with a $41-billion equity base. It's
not like they're going out of business," she