J.P. Morgan's 'face-plant'
Suffering from overexposure
Steve Maich
Financial Post
Justin Lane, New York Times
Marc Shapiro, vice-chairman of J.P. Morgan Chase, has had to explain why the company had so much at stake in Enron. The bank is also suffering from exposure to Argentina, Global Crossing and Tyco.
Of the thousands of investors nervously eyeing the crisis of confidence at Tyco International Inc., none are sweating more than the bankers at J.P. Morgan Chase.
In the parade of bankruptcies and distressed debt tumbling through the market in the past few months, J.P Morgan has found itself on the firing line again and again.
From Argentina's historic default to Enron Corp.'s record bankruptcy and Global Crossing Ltd.'s anti-climactic demise, the second-biggest U.S. bank has been consistently caught holding the bag when the music stops.
"We question their risk management highly," said David Hendler, an analyst with CreditSights Inc. "They thought that they'd just be able to skate through a lot of these problems, flying under the radar. It hasn't worked and what you're seeing is a chain reaction."
Fear is spreading through the market as financial institutions reveal more about their damages stemming from a record number of corporate defaults in the past three months. Nowhere are those concerns more serious than at J.P. Morgan, which faces up to US$2-billion in losses from the Enron failure alone.
With bond investors and corporate lenders now turning their backs on Tyco, investors fear that another financial domino may be falling on J.P. Morgan. The bank leads a consortium underwriting US$5.9-billion in Tyco financing.
William Harrison, chief executive, acknowledged in a memo to employees yesterday that the bank has made several mistakes in its loan portfolio lately, and promised change. That helped J.P. Morgan stock (JPM/NYSE) gain US42¢ to US$29.44 on the day, but the changes being promised won't come easily, Mr. Hendler said.
Four years ago, the bank began to push into low-yield venture capital and corporate debt financing in hopes it would lead to lucrative equity underwriting and bond offering deals. Now, with many of its high-profile clients failing or relying on bank lines of credit for survival, J.P. Morgan's plans are in tatters, Mr. Hendler said.
"That strategy has blown up in [J.P. Morgan's] face," Mr. Hendler said. "Their balance sheet is starting to balloon with questionable credit. It's a complete face-plant, and it's serious."
The stock has fallen 24% in a month, and now sits below the US$30 level for the first time since October, 1998, when the Russian debt crisis and Asian economic flu pounded financial services stocks around the world.
J.P. Morgan is far from alone in its debt troubles. For some banks, the stakes may be just as dire as they were back in 1998.
Citigroup wrote off US$228-million in loans to Enron and another US$470-million related to Argentina's debt default and currency crisis in the fourth quarter.
This week, Toronto-Dominion Bank increased its loan-loss provision by $375-million. Banc of America is also heavily exposed to loan losses.
But no bank's portfolio is dotted with as many high-profile flameouts as J.P. Morgan's, analysts said. The bank's losses on the Global Crossing default are estimated at about US$200-million. Kmart Corp. drew down a US$1.6-billion credit line from a consortium of banks led by J.P. Morgan last month, just days before filing for bankruptcy protection.
If the J.P. Morgan's fourth-quarter earnings are any indication, investors have plenty to be concerned about.
The bank had a loss of US$332-million in the quarter, its first losing quarter in more than five years, due mainly to US$456-million in writeoffs related to Enron, US$351-million from Argentina and US$385-million in losses from private equity deals.
"I didn't have to go too deeply into it to see it was heading down," said Derek Webb, head of Webb Capital Management in San Francisco, who sold the stock short following the earnings release. "The earnings and the numbers were heading down so it looked like a good short."
The bank continues to be dogged by rumours. Yesterday, executives were forced to deny whispers that J.P. Morgan was selling gold short and lost millions in the metal's recent surge.
If the bank feels under siege from short sellers, it may soon become used to the feeling, Mr. Hendler said. He expects major credit agencies to cut J.P. Morgan's debt ratings, forcing the bank to sell off businesses and slim down its balance sheet to regain the consistent profitability investors used to take for granted. |
