WSJ/Major Business News: Enron's Collapse Raises New Questions About Banking-Deregulation Measure
November 30, 2001
By CARRICK MOLLENKAMP and RICK BROOKS
Staff Reporters of THE WALL STREET JOURNAL
In 1999, Congress swept away a landmark Depression-era law that prevented banks from doing business on Wall Street, and vice versa. The move created financial supermarkets that could offer investment banking, merger advice and loans -- all at once.
Now the downside of giving banks more freedom is becoming clear in the wake of Enron Corp.'s collapse, say some bankers and other industry experts. J.P. Morgan Chase & Co. and Citigroup Inc., longtime Enron financiers, won an investment-banking mandate on the failed Enron-Dynegy Inc. deal only after agreeing to extend fresh loans to the troubled energy trader. As a result, the two banking concerns have suffered a double-whammy: a bad deal and bad loans. "You get the worst of both worlds," said Eugene Putnam, chief financial officer of Sterling Bancshares Inc., a bank-holding company in Houston.
A Citigroup spokesman declined to comment. Marc Shapiro, a J.P. Morgan vice chairman, said in an interview that using Enron to indict looser restrictions on U.S. financial institutions "is like saying that because Mariano Rivera gave up a run in the last inning of the World Series that you shouldn't have relief pitchers anymore."
"The danger to banks is when they are restricted to only the traditional lending business," Mr. Shapiro added. "That's when banks have problems."
J.P. Morgan has $500 million of unsecured exposure to Enron entities, including loans, letters of credit and derivatives. It also has secured exposures, including $400 million in loans backed by pipelines that J.P. Morgan estimates are worth between $4 billion and $5 billion. "We made a loan ... which was perfectly safe and will be repaid and will not be a problem," Mr. Shapiro said.
1See full coverage of the rise and fall of Enron
Citigroup hasn't disclosed its exposure to Enron, but officials familiar with the situation said its exposure is similar to that of J.P. Morgan.
Banks have made little secret since the old restrictions crumbled that they are willing to make loans in order to win investment deals. Bank of America Corp., for instance, has indicated that if a certain borrower wants a loan, then the borrower should ante up when it is time to choose a merger or deal adviser. This week, bank officials told analysts that it formed earlier this year a new risk-management process to bolster checks and balances in its lending operations.
The original restrictions came in 1933 after Sen. Carter Glass of Virginia, who was working with Rep. Henry Steagall of Alabama, reacted to the perception that banks' errant investments in the stock market helped precipitate the Great Depression.
To be sure, even before 1999, some banks found ways around the longtime restrictions. The $72.6 billion merger of Citicorp andTravelers Group Inc. into what is now Citigroup created a financial colossus that offered commercial banking along with corporate finance and securities underwriting. The 1998 merger was among the factors that propelled Congress to overhaul the 1933 act. The overhaul gave banks a freer hand in offering loans and merger advice.
With the walls of the Glass-Steagall Act now down, "the banks have been more aggressive in using the balance sheet," Mr. Putnam of Sterling Bancshares said. Had the Enron-Dynegy deal gone through, J.P. Morgan and Citigroup would have "pounded on Dynegy's door" to remind them who helped get the deal done, he says.
But is it worthwhile for banks to loan money on a risky deal if it will help land investment-banking fees? The risks are even bigger during economic downturns, when there are fewer good loan deals. "There are too many dollars chasing too few good ideas," said Harold Schroeder, a money manager at Carlson Research and Analytics Inc. in New York.
D. Anthony Plath, a finance professor at the University of North Carolina at Charlotte, said it is too soon to tell whether Enron's calamity shows that it was a bad idea to knock down the Depression-era walls between lending, underwriting and giving merger advice. "You can't say that 2001 is 1930," he said. "It's not deregulation that is good or bad; it's how bankers deal with it."
Tom Burnett, president of Merger Insight, an M&A research firm, said the fallout from Enron's banking relationships with J.P. Morgan Chase and Citigroup shouldn't be used to argue for a return to old restrictions against engaging in both lending and investment banking.
Mr. Burnett said U.S. financial institutions need the broadened powers in order to compete globally. "The people who took the big play and took the big risk are going to have egg on their face, but I don't think it's having a far-reaching impact on banking," he said.
Indeed, even as their relationship with Enron draws attention, Citigroup and J.P. Morgan are credited with saving companies such as Lucent Technologies Inc. with a similar infusion of financing and investment-banking advise.
Mr. Shapiro said Morgan has no plans to slow its push to offer an ever-growing variety of lending and investment-banking services to big companies. "We're one of the few institutions in the world that could provide the help that [Enron] needed," he said. "I think that will help us in our relationships with thousands of other clients."
-- Martha Brannigan contributed to this article.
Write to Carrick Mollenkamp at carrick.mollenkamp@wsj.com2 and Rick Brooks at rick.brooks@wsj.com3
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