The Clan of Seven
February 22, 2002
From today’s Wall Street Journal: “The Federal Reserve Bank of New York is examining J.P. Morgan Chase’s accounting for commodity-related trades with Enron Corp., according to internal central-bank documents reviewed by The Wall Street Journal. The trades being reviewed by the Federal Reserve appear to relate to an offshore entity set up by the old Chase Manhattan Bank a decade ago through which it came to do substantial business with the once-mighty energy company. The big volume of trades between the offshore operation, called Mahonia Ltd., and Enron surfaced weeks ago in litigation connected with Enron’s bankruptcy-court filing, raising questions as to whether Mahonia was a vehicle for loans disguised as trades that helped Enron draw a misleading financial picture for investors.”
Today from Bloomberg – “J.P. Morgan Chase & Co., the second-largest U.S. bank, has suddenly become a growing risk for bond investors. The cost of insuring J.P. Morgan Chase’s $43 billion of notes and bonds against default more than doubled in the past month…The price for default protection rose to $80,000 for $10 million of J.P. Morgan Chase debt from $35,000 on Jan. 28, according to Morgan Stanley. At that price, the highest since the bank was formed in a January 2001 merger, investors are paying about twice as much as for comparable insurance on the bonds of Citigroup Inc., the world’s largest financial-services company, and Bank One Corp., the sixth-largest U.S. bank.”
Also from today’s Wall Street Journal: “Two hedge funds run by prominent money manager Kenneth Lipper were forced to slash the value of their portfolios by about $315 million, following heavy losses in the convertible-bond market. The losses, representing a decline of as much as 40% in one of the funds since the end of November, sparked selling in both the stock and bond markets Thursday as investors worried that Mr. Lipper would be forced to dump investments to raise money…The firm said it was forced to slash the value of its holdings after concluding that the value of its securities had tumbled and wouldn’t recover anytime soon. That problem was made worse by the fact that the firm focused on riskier and relatively illiquid securities that were difficult to price accurately...”
The money supply numbers continue to be rather interesting. For the week, M3 declined $3 billion, while M2 increased $10 billion to a new record. Total (non-large time deposits) savings deposits, a component of M2, jumped $21.5 billion, and are now up $464.6 billion – 24% - over the past 12 months. Institutional money market fund assets, having surged almost $200 billion over 14 weeks (post-WTC), have now declined about $44 billion over two months. This largely explains the recent stagnation of broad money supply growth, but it is a bit of a stretch at this point to read too into this development. During frenetic refinancing booms, like we witnessed during the fourth quarter, there is massive Credit creation with the GSEs and leveraged players expanding holdings of new mortgages and securities. These purchases create enormous amounts of liquidity for the sellers. These “funds” are then deposited, often to institutional money market accounts. Homeowners that have refinanced or taken out home equity loans also have additional liquidity that makes its way into banking or money market deposits. But once the refi boom dissipates some of these funds then are drawn back into the securities markets as companies rush to issue longer-term debt. Fixation on money supply at the expense of general Credit and liquidity conditions is analytically disadvantageous..................
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