J.P. Morgan's Debt Swapping Passes Lending as Top Money-Maker
quote.bloomberg.com
J.P. Morgan Chase & Co., for more than 200 years, has made most of its money by arranging loans to governments, companies and individuals. So far in the 21st century, the bank is getting more revenue by rearranging borrowers' debt payments in the so-called swap market.
The second-biggest U.S. bank gets as much as $10 billion a year helping customers from Fannie Mae, with the highest credit rating, to Humana Inc., whose debt is at the lowest investment grade, get cheaper financing by exchanging one borrower's fixed debt payments for another's floating rate obligation. These interest-rate and currency swaps are now New York-based J.P. Morgan's biggest money-maker.
``This is a leviathan business for us,'' said Michael Davie, 41, London-based managing director and co-head of European interest rates at J.P. Morgan, which last week agreed to buy Bank One Corp. of Chicago to boost its assets to more than $1 trillion.
The market for interest-rate and currency swaps, invented in 1981 by Salomon Brothers banker Jon Rotenstreich for International Business Machines Corp., grew 20 percent in the first half of last year to $100 trillion, according to the Basel, Switzerland-based Bank for International Settlements.
``Derivatives and interest-rate swaps help spread risk in our economy and are one of the leading reasons that our capital markets are the best in the world,'' said Gary Gensler, a former U.S. undersecretary of the Treasury under President Bill Clinton. Gensler was called in to assess the damage to world financial markets posed by the possible collapse of hedge fund Long-Term Capital Management's derivatives positions in 1998.
Borrowed Money
U.S. Federal Reserve Chairman Alan Greenspan has said swaps and other derivatives -- financial obligations whose value is derived from debt or equity securities, commodities or currencies -- make markets and economies more flexible and resistant to shocks by spreading risk.
J.P. Morgan, which reports earnings tomorrow, has about $22.4 trillion in swaps contracts outstanding, the most in the U.S., according to the Office of the Comptroller of the Currency in Washington. Bank of America Corp., based in Charlotte, North Carolina, is second with about $8.6 trillion.
Banks' secrecy about disclosing revenue or profit from swaps makes it difficult for investors to know how much risk a bank is carrying on its books and whether the revenue can be counted on in the future, investors said. And Greenspan has said that risk may be concentrated among too few banks.
```Derivatives' has almost become a bad word in the investment community, and so firms like to hide behind trading revenue,'' said Wayne Bopp, who owns J.P. Morgan shares along with the $31 billion he helps manage at Fifth Third Bancorp in Cincinnati. ``As an investor you know it's there and you know it's not steady or regular or dependable. If somebody like J.P. Morgan would step up and disclose more, others might follow.''
Buffett
Warren Buffett, chairman of Berkshire Hathaway Inc., began liquidating General Re Securities, the derivatives business of one of Berkshire's insurance companies, after failing to sell it in January 2002. The difficulties he encountered in unwinding more than 14,000 derivatives led him to conclude that the range of the contracts ``is limited only by the imagination of man or sometimes, so it seems, madmen.''
It took the banks that bailed out Long-Term Capital 18 months to unwind all its derivatives contracts, Gensler said. A failure by one of the biggest banks in the swaps market would force companies to revert to their original payment obligations in hundreds of thousands of cases, he said. |
