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Pastimes : Home on the range where the buffalo roam -- Ignore unavailable to you. Want to Upgrade?

To: Sam Sara who wrote (8255)	12/29/2000 4:05:44 PM
From: mishedlo	Read Replies (1) \| Respond to of 13572

JPM fell like a rock late in the day. At least that give me something to cheer about. ========================================================= biz.yahoo.com TheStreet.com - View from TSC Specter of Bad Loans Haunts Chase-J.P. Morgan Union Chase's exposure to troubled Xerox deepens worries about deteriorating credit quality amid slowing economy. By Eileen Kinsella Staff Reporter Chase Manhattan (NYSE: CMB - news) and J.P. Morgan (NYSE: JPM - news) are getting set to tie the knot in time for the new year, but there could be some baggage on the honeymoon -- syndicated loans. If the banks close their merger on Sunday as expected, Chase's exposure to beleaguered Xerox (NYSE: XRX - news) will be duplicated, bringing the total to $750 million. And one analyst says the merger brings Chase's roughly $35 million exposure to now bankrupt Armstrong (NYSE: ACK - news) to about $70 million. No one but the banks themselves knows how many additional overlaps exist. These amounts may be small for a company with a combined loan portfolio of $218 billion, but the increased exposure will make it tough to remain immune to the sort of bad loans that have hurt profits at banks including Bank of America (NYSE: BAC - news) , First Union (NYSE: FTU - news) and Wachovia (NYSE: WB - news) . "Chase talks about how it likes to get its exposure down to less than 10% of the original loan," says David Berry, banks analyst at Keefe Bruyette & Woods . "The problem with [Xerox] is that [Chase's] merger partner is also an agent on the credit." (Berry rates Chase a buy, and his firm hasn't done underwriting for the bank.) Out in Front To date, Chase has managed an impressive balancing act of leading the syndicated loan market while maintaining solid credit quality. Chase had about 30% of the market through September, ahead of second-place Bank of America at roughly 25% and third-place Salomon Smith Barney at 12%. Syndicated lending -- large loans involving three or more institutions -- has become the financial equivalent of a red flag in recent months, as banks have watched bad loans eat into profits. Banks like the lucrative underwriting fees and the prospect of further underwriting business that comes with the loans. But a recent report from the Federal Deposit Insurance Corp. said much of the current credit deterioration can be traced to the "seasoning" of syndicated loans made in 1997 and 1998, when many banks softened their lending standards. Bank of America recently faced up to the severity of its problem loans. Chase, meanwhile, emphasized earlier this month that "nonperforming assets are not expected to increase materially in the fourth quarter." It said credit risk measures for both firms remained stable. Chase and J.P. Morgan declined to comment for this story. But some observers are wondering how much longer the high wire act at Chase can last, particularly now that the risk of another bank is being added to the mix. In 1997, more than 50 banks participated in the $7 billion backup credit to Xerox. But in recent quarters, Xerox has had a string of profit warnings. A third-quarter loss was followed by a debt downgrade that effectively shut Xerox out of the commercial paper market, which many companies use to fund day-to-day operations. A number of banks including Bank One (NYSE: ONE - news) and Citigroup (NYSE: C - news) reportedly made original commitments of $375 million each. But J.P. Morgan and Chase together have more exposure to the troubled credit than any other bank. And speculation about a Xerox bankruptcy -- and the prospect of substantial bank exposure -- only intensified last week as the company exhausted the last of the multibillion dollar credit and warned of a wider-than-expected fourth-quarter loss. Cutting the Risk Andy Collins, banks analyst at ING Barings , says the banks may have reduced their exposure to the Xerox credit by selling pieces of the loan or using credit derivatives, which protect assets against a change in value. (ING rates Chase and J.P. Morgan buys, and the firm hasn't done underwriting for either bank.) Berry of Keefe Bruyette & Woods agrees that Chase has a track record of mitigating risk, but says, "I'm not sure I would assume they have sold things down, given the fact that Xerox has sort of had issues for a while," and the merger was announced just about four months ago. Indeed, banks rarely comment on individual loans or client relationships, and securitizations make it difficult to know exactly how much exposure a bank has at a given time, but the law of averages provides at least a rough snapshot of risk. (Securitization involves converting bank loans or assets into securities, which are then sold to investors.) Berry calculates that a nonperforming Xerox loan would take the level of bad loans to $2.7 billion for the new J.P. Morgan Chase , from a pro forma $1.9 billion at the end of September. (Nonperforming assets are loans that are past due but haven't been charged off.) If they "get into a situation where Xerox goes nonperforming, you sure would see it in the quarter it goes on," he says. The ratio of nonperforming assets to loans would rise from 0.9% to 1.2%, still solid when compared with most regional banks, but a warning sign nonetheless, he says. There's "definitely going to be deterioration in credit quality over the next year, particularly given the slowing economy," says Collins. "You've got to be very selective about the banks you invest in." See TheStreet.com's full site for more of its unique insider's perspective on Wall Street.