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More examination of Morgan Chase gold derivatives

Section: Daily Dispatches

8:59p ET Thursday, February 7, 2002

Dear Friend of GATA and Gold:

Our friend Reg Howe first raised the issue of the
disproportionate position in derivatives of J.P.
Morgan Chase. Today it was the subject of John
Crudele's column in the New York Post, published
just a few blocks from the corner of Broad and
Wall Streets. It's a good bet that it was read by
some of the denizens of that neighborhood.

Thanks, Reg.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

Is J.P. Morgan Chase too big to bail?

By John Crudele
New York Post
February 7, 2002

Is J.P. Morgan Chase too big to bail?

Last week I posed the more common question: Was the
bank too big to fail, or allowed to fail by the government?

It's a logical question, since J.P. Morgan Chase has had
a string of bad luck recently, including involvement with
Enron. The bank says its luck hasn't been as bad as it
looks, and I'll get to that in a minute. But J.P. Morgan
chief exec William Harrison admitted publicly yesterday
that the bank had assumed too much risk in dealings
with Enron.

But I saved potentially the most ominous and admittedly
most confusing of J.P. Morgan Chase's bets for last --
derivatives. Lot and lots and lots of derivatives. Enough
derivative exposure, in fact, to dwarf the entire gross
domestic product of the United States.

What are derivatives? They are investments -- gambles,
really, like those made by Enron -- on things that are
quot;derivedquot; from other investments. The dollar, interest
rate spreads, stocks, livestock -- you name it, because
your guess will be as good as anyone else's outside
of J.P. Morgan.

J.P. Morgan declined a request to discuss its massive
derivative position even as it was defending its streak
of bad luck.

Just how massive is Morgan's derivative gamble? Get
this -- it has a potential, or notional, value of $29
trillion. That is in addition to net credit exposure
of $94.7 billion. Trillions in derivatives. As in
three times the nation's entire annual gross domestic

Here is another comparison to consider: Citigroup,
another giant bank, only has $9 trillion in derivative
exposure. Says Jim Grant of Grant's Interest Rate
Observer: quot;So dominant is Morgan Chase in the
derivatives market that its exposures look like
typographical errors.quot;

Adds bank analyst Charles Peabody of Ventana
Capital, quot;It's an incredible figure and it's very
dangerous. There's no exit.quot;

On the bright side, J.P. Morgan Chase's derivative
position has been growing steadily for years, so far
without an apparent mishap. But, then again, the
country and the banking industry hasn't been through
a recession in recent years. As for its bad luck in
loans to companies like Kmart, Global Crossing,
Enron et al., as well as Argentina, J.P. Morgan
Chase says that its losses on commercial loans
are equal to less than 1 percent of its total portfolio.
And it promises that it isn't hiding any losses off the
balance sheet -- like PNC Bank is accused of doing.

And apparently taking one from the Ken Lay quote
book, J.P. Morgan Chase says I'm relying too much
on a small group of bank industry analysts in my

I hope the bank is right, because J.P. Morgan Chase's
dabbling in derivatives makes it too big for even the
Federal Reserve to bail out.