J.P. Morgan Chase & Co. announced Thursday that it will recoup as much as $654 million of losses on trades with Enron Corp. after settling with insurers who backed the transactions.
J.P. Morgan had sued 11 insurers that refused to pay $1.1 billion of surety bonds that backed energy trades the bank made with Enron, which filed for bankruptcy protection last year.
J.P. Morgan's earnings will be cut by $260 million in the fourth quarter because of the settlement, Chief Executive William Harrison said.
"Up until this, it looked like things weren't going J.P. Morgan's way," said James McGlynn, who helps manage $5.7 billion at Summit Investment Partners, including J.P. Morgan shares. "Anything over 50% probably way exceeded people's expectations."
The bank, which still faces Enron shareholder lawsuits, will set aside $600 million for other legal matters. The settlement and reserve will cut fourth-quarter earnings per share by about 43 cents, causing the bank to lose money in the quarter, Chief Financial Officer Dina Dublon said.
J.P. Morgan sought the money after the insurers claimed that they were tricked into backing loans between J.P. Morgan and Enron that were disguised as commodity trades with Mahonia Ltd., a bank-sponsored offshore entity.
The case, which has been on trial for a month, was to go to the jury Thursday.
J.P. Morgan attorney John Callagy argued before the jury that the insurers knew that Mahonia, based in the Channel Islands, was a special-purpose vehicle that helped Enron raise money.
Alan Levine, the lawyer for insurers Travelers Property Casualty Corp. and St. Paul Cos., said the bank failed to disclose crucial elements of transactions in which the bank forwarded money to Mahonia for future delivery of commodities.
J.P. Morgan is still being investigated by the Securities and Exchange Commission, the Federal Reserve, Congress and other regulators for its role in the failures of Enron and WorldCom Inc.
A Senate report released Thursday said J.P. Morgan, along with Citigroup Inc. and Merrill Lynch & Co., helped Enron mislead investors and subvert accounting rules. The banks aided the energy trader by structuring transactions that allowed Enron to hide debts, the report said.
The report, issued by the Senate Governmental Affairs Permanent Subcommittee on Investigations, also called on the SEC to issue a policy statement saying it would take enforcement action against any bank that offers deceptive financial products.
Under the settlement, CNA Financial Corp.'s Continental Casualty Co. and National Fire Insurance Co. of Hartford will pay $46.7 million, Allianz's Fireman's Fund $92.3 million, Safeco Corp. $33.2 million and Lumbermens Mutual Casualty Co. $93.7 million.
Travelers said it would pay $139 million after accounting for the sale of its bankruptcy claims. St. Paul's St. Paul Fire & Marine Insurance Co. will pay $70 million and Chubb Corp.'s Federal Insurance Co. settled for $95.8 million.
Hartford Financial Services Group will pay $21 million and Liberty Mutual Insurance Co. less than $12 million.
J.P. Morgan shares rose $1.44 to $25.44 in New York Stock Exchange trading.
Insurance company shares also rose. Travelers gained 35 cents to $15, Chubb climbed $1.72 to $53.92, and CNA Financial rose 90 cents to $26.50, all on the NYSE.