Mighty J.P. Morgan in the Hot Seat

In the rubble of recent financial collapses, one prestigious institution seems especially vulnerable: J.P. Morgan Chase & Co., the nation’s second-largest bank.

The New York company, a lead lender to Enron Corp., Kmart Corp. and telecommunications firm Global Crossing Ltd., is at risk of losing billions in dealings with bankrupt firms, as well as losing heavily in Argentina’s economic meltdown.

J.P. Morgan also lost $1.1 billion last year on its stakes in businesses, including many ailing technology companies, and is accused by insurers of helping Enron conceal vast losses. Morgan strongly disputes the charge, but the allegation, coupled with the hefty losses, raises questions about the judgment of an institution that traces its roots back more than 200 years.

The bank’s woes, accompanied by sizable losses on loans at many other financial giants, also reveal chinks in a banking industry generally regarded as a pillar for the nation’s recovery from an economic slowdown and from Sept. 11.

J.P. Morgan fares badly in comparison with big competitors such as Citigroup Inc., the largest U.S. banking concern, and Bank of America Inc., the third-largest. Despite their huge losses in Argentina, Enron and other corporate collapses, Citigroup earned $4 billion and BofA posted a profit of $2 billion in the fourth quarter, bolstered in part by robust consumer lending.

Morgan, by contrast, lost $332million in the fourth quarter, compared with a $708-million profit a year earlier. For the year, the company still earned $1.6 billion.

Wall Street’s skittishness over projected losses at J.P. Morgan has been apparent in the steady stock sell-off in recent weeks after a “continuing parade of train wrecks,” in the words of analyst E. Reilly Tierney at Fox-Pitt Kelton in New York.

The stock, which traded above $40 early in December, hovered near $32 this week before closing Thursday at $34.05, up 99 cents a share, on the New York Stock Exchange.

Some analysts remain bullish on Morgan, saying the institution is fundamentally sound and the financial setbacks are only temporary. And by some industry measures, J.P. Morgan’s financials look sturdy. A key ratio of nonperforming assets to total assets, for example, was just 0.87% as of Dec. 31, well below the 2% figure regarded as a sign of potential trouble.

Investors’ concerns surfaced in December after Enron’s bankruptcy, when J.P. Morgan, which had a reputation for usually disclosing bad news promptly and completely, suddenly tripled its estimate of its potential Enron losses, to $2.6 billion.

Nearly $1 billion of the total stemmed from insurers’ refusals to pay Enron-related claims on unfulfilled energy contracts. The insurers contended in a lawsuit filed in federal court in New York that the losses resulted from J.P. Morgan’s setting up “sham” offshore energy trading concerns to do business with Enron.

J.P. Morgan contends its energy trading companies were above board, adding that--unlike Enron--it included the results on its balance sheets.

The bank also says the hefty loan losses from the mammoth bankruptcies are a result of J.P. Morgan’s position as the leading arranger of the biggest credit lines to the biggest businesses. These so-called syndicated loans are carved up and shared by dozens of banks.

“We’re handling 40% of the syndicated loans, and when companies go down we tend to be exposed,” said J.P. Morgan spokeswoman Kristin Lemkau.

But other banks in the syndicates typically take on responsibility for more than 90% of the amounts lent. Though J.P. Morgan arranged $1.6 billion in credit lines for Kmart, for example, it had just $117 million in unsecured loans when the retailer filed for bankruptcy last month. Likewise, though J.P. Morgan had helped arrange $2.25 billion in loans for Global Crossing, it’s now owed less than $100 million by the telecom firm, according to people close to the situation. And while J.P. Morgan still has a $500-million exposure to Argentina, Citigroup and FleetBoston have far more.

Indeed, only about 10% of J.P. Morgan’s earnings come from lending these days, compared with 50% a decade ago, Lemkau said, meaning its comparative credit risk exposure actually has declined dramatically.

Still, there’s no denying the bank’s missteps, which include an 8% stake in an Argentine bank accused of fraud, and loans to a European cable TV company that has threatened to default on $17.5 billion in debt.

Prospects looked far brighter at the end of 2000, when J.P. Morgan Chase & Co. emerged in its current manifestation via the colossal merger of Chase Manhattan Corp. and J.P. Morgan & Co.

After deregulation tore down walls separating banks, brokerages and insurers, the idea was to compete better with Citigroup--itself formed in the merger of Citicorp and Travelers Group--by selling more services to clients. The newly formed giant hoped especially to persuade companies with bank loans to use J.P. Morgan’s investment banking services, which typically are more profitable than commercial lending.

But the technology meltdown, the recession and Sept. 11 combined to create the worst environment in years for stock offerings, mergers and other staples of investment banking.

The big question now, Tierney said, is whether J.P. Morgan failed to assess credit risks properly at companies because it figured making loans was a sure path to bigger profit on other services.

However, Lemkau said the dollar amount of corporate loans on J.P. Morgan’s books has declined for the last three years. “It’s a misconception we’re lending like a drunken sailor so we can get our hand on more profitable businesses,” she said. “It’s just not true.”

No doubt reflecting the uncertainties facing all financial institutions after Sept. 11 and the Enron meltdown, the range of expert opinions about Morgan is astonishingly wide.

Some analysts, such as Michael Mayo at Prudential Financial, have slapped “sell” ratings on the bank while others, such as Diana P. Yates at A.G. Edwards & Sons Inc., rate it a “strong buy.”

Yates characterized concerns over the insurers’ allegations of collusion with Enron as “overdone.” She also warned against judging J.P. Morgan by its admittedly atrocious last quarter.

“They’re taking some hits, but they’re a big company with a $41-billion equity base. It’s not like they’re going out of business,” she said.