"I don't look at things when I can't understand them," said Price, who now manages US$500 million in personal and college endowment funds. He said that he would not consider buying the stock until it was trading closer to half its current value. "If there is more uncertainty, I want a lower price," he said.
That sums up the dilemma facing Harrison and his team. Doing nothing means not addressing investors' anxieties. But doing enough, too quickly, to fix its problems -- say selling a large portion of its loan portfolio at a steep discount -- might lead the ratings agencies Standard & Poor's and Moody's Investors Service to lower the bank's credit rating again.
Both S&P and Moody's lowered their ratings on the bank's debt in recent weeks. A lower rating, which suggests greater risk, can mean higher borrowing costs for a bank, and other institutions may demand more collateral to trade with the company, also raising costs.
JP Morgan got itself into this fix fairly recently. Harrison bet big on expanding its presence in investment banking, undertaking a string of deals in 1999 and 2000, just as the stock market was peaking.
As the chief executive of Chase Manhattan, he bought Hambrecht & Quist, an investment bank specializing in technology stocks, for US$1.35 billion; the Beacon Group, a merger advisory boutique, for an estimated US$450 million; and Robert Fleming Holdings, an investment bank based in London, for US$7.7 billion.
Chase merger
In September 2000, Harrison made his biggest bet of all, initiating the US$31 billion merger of Chase with JP Morgan.
At the same time, Chase became one of the largest backers of telecommunications companies, financing such ill-fated businesses as Global Crossing and Lucent Technologies. One recent fiasco came in July, when Genuity, an Internet services company, defaulted on a US$2 billion bank loan. JP Morgan had originally provided US$500 million of that loan, although it may have since reduced its holding. Genuity is in negotiations with its lenders and has since repaid US$208 million to its banks.
When JP Morgan reported its results for the third quarter last month, Harrison conceded that the bank had made too big a bet on telecommunications. But he insisted that the company's strategy of expanding in investment banking would yet pay off.
"We have made some mistakes," he said in a conference call with analysts on the day the results were announced. Still, he added, "these actions that we are taking do not detract in any way from our commitment to our long-term strategy."
Some investors may have been persuaded, or perhaps the stock's steep drop made it irresistibly cheap. JP Morgan's shares closed at US$22.09 on Friday, up nearly 45 percent from Oct. 9, when it dropped to US$15.26.
If the economy and the markets continue to lag, it could take a long time for JP Morgan to recover. The weak economy is forcing the bank to cut back its stock-underwriting business. Building that business was one of the goals of the merger of JP Morgan and Chase. It also said it would lay off more than 2,000 investment banking employees.
The retreat has led some analysts to worry that JP Morgan will lag behind its competitors once the economy comes back -- and that if the downturn continues the bank's already weak profitability may lead it to look for further savings.
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