Dow Jones Business News
Federal Judge Dismisses J.P. Morgan Chase's 11 Fraud Claims Against Insurers
Monday September 16, 10:42 am ET
By Tara Siegel Bernard
Dow Jones Newswires
NEW YORK -- J.P. Morgan Chase & Co.'s fraud claim against 11 insurers was dismissed late Friday by a federal judge, which could thwart its attempt to collect nearly $1 billion in losses on trades with bankrupt energy trader Enron Corp. (ENRNQ).
"Coming as it does with potential credit-rating downgrades looming, this is a significant setback," said analyst Brock Vandervliet of Lehman Brothers Inc.
The Lehman analyst was referring to a recent move by major credit-rating agencies that put J.P. Morgan Chase's ratings on review for a possible downgrade.
"We expect full disclosure from the bank shortly on earnings implications tied to this issue," he said in a note.
J.P. Morgan Chase management said at a recent investor conference hosted by Merrill Lynch & Co. (MER) that it didn't have additional capital set aside to cover any potential losses related to the claim. At the same conference, the company's chief executive, William B. Harrison Jr., opened the door to speculation that the company might have to cut its dividend. He acknowledged that the dividend "at 60% of operating earnings and almost 70% of reported earnings" is "high."
"In determining the dividend, we look at what we are currently paying out, our capital position and our outlook for earnings," Mr. Harrison said. "My preference is to maintain the current dividend given our strong capital position, but a key issue will be our medium-term outlook for earnings."
The insurers involved -- including Liberty Mutual Insurance Co., Safeco Insurance Co. (NasdaqNM:SAFC - News) , St. Paul Fire & Marine Insurance Co. , and Citigroup Inc.'s (C) Travelers unit -- are embroiled in litigation with J.P. Morgan Chase over who should bear the cost of nearly $1 billion in Enron financing that has gone bad following Enron's collapse.
J.P. Morgan Chase has said the insurers should pay because they guaranteed with "surety bonds" the series of failed energy trades between Enron and Mahonia, an offshore, special purpose entity controlled by J.P. Morgan Chase. The insurance companies have refused to pay because they believe the arrangements were really loans disguised as trades.
J.P. Morgan Chase puts forth the counterclaim that the insurance companies were well capable of understanding the complex transactions and they actually sold the surety bonds with no intention of ever paying up if called to do so.
The insurers, meanwhile, have further accused J.P. Morgan Chase of conspiring to make Enron look healthier than it was as part of an effort to enable Enron to continue making payments on huge loans already owed to the bank.
J.P. Morgan Chase earlier this summer said that if it were to lose the suit, its capital adequacy would only deteriorate by 0.1% percentage point to 8.6%, from 8.7%.
-Tara Siegel Bernard, Dow Jones Newswires; 201-938-5288; tara.siegel@ dowjones.com
biz.yahoo.com |
