JP Morgan Chase & Co, the second-largest US bank, has suddenly become a growing risk for bond investors.
The cost of insuring JP Morgan Chase's US$43 billion of notes and bonds against default more than doubled in the past month.
Some investors are concerned the bank holding company's credit rating may be lowered because of US$3.8 billion in potential losses related to Enron Corp, Global Crossing Ltd, Kmart Corp and Argentina that analysts estimate the bank made.
"The exposure they have to some of these risky companies is larger than the market would like to see," said Michael Pohly, executive director of credit derivatives for Morgan Stanley Dean Witter & Co, which matches buyers and sellers for the insurance.
The price for default protection rose to US$80,000 for US$10 million of JP Morgan Chase debt from US$35,000 on Jan. 28, according to Morgan Stanley. At that price, the highest since the bank was formed in a January 2001 merger, investors are paying about twice as much as for comparable insurance on the bonds of Citigroup Inc, the world's largest financial-services company, and Bank One Corp, the sixth-largest US bank.
The cost of default insurance reflects investor unease that began last year as JP Morgan Chase's shares plunged and the yield on its bonds rose. JP Morgan Chase's 6.75 percent bonds that mature in 2011 now yield 6.35 percent, the highest among the 10 biggest US banks. In November, the yield was the fourth lowest among the big banks.
The bank, whose founder J. Pierpont Morgan Sr. saved the US financial system in the 1907 panic, is far from default. Moody's Investors Service, Standard and Poor's and Fitch Ratings have all assigned JP Morgan Chase a rating that is six levels above non- investment grade, or junk.
Kristin Lemkau, a spokeswoman for JP Morgan Chase, which has about US$800 billion in assets, said the bank would have no comment.
JP Morgan Chase's default insurance rates began climbing early this month after Chief Executive Officer William Harrison said the bank had assumed too many risks in its dealings with Enron.
"In light of JP Morgan's piecemeal disclosure about their Enron and Argentina exposure, the markets are pricing in a cushion to safeguard against anything else that might come out of the woodwork," said Michael Stead, who manages the US$700 million SIFE Trust Fund, which owns 550,000 JP Morgan Chase shares.
JP Morgan Chase shares have fallen 43 percent in the past year in part because of concern the bank will suffer big loan losses. That compares with a 14 percent decline for Citigroup and a 26 percent gain for Bank of America Corp, the third-largest bank. JP Morgan shares fell 4.3 percent to US$27.94 on Friday after the Wall Street Journal reported the Federal Reserve Bank of New York is probing how the bank accounted for trades.
Shareholders sued the bank Feb. 15, alleging JP Morgan Chase broke securities laws by failing to disclose fully the amount of money it might lose because of its loans to Enron. JP Morgan Chase, which said the suit was without merit, wrote off US$456 million of trading losses and loans to Enron in the fourth quarter.
It still has US$2.06 billion of Enron exposure.
The Securities and Exchange Commission also is reviewing JP Morgan Chase's transactions with Enron, according to people familiar with the situation.
Some investors said the drop in shares and bonds has been exaggerated and may soon end.
"I don't think things are as dire as some investors want to make out," said Steve Wharton, who helps Loomis Sayles & Co manage about US$70 billion, including 1.4 million JP Morgan Chase shares. "I think the stock will be higher 12 months from now."
The credit rating companies are more skeptical.
"It wouldn't take too much more bad news to downgrade" the company, said Tanya Azarchs, senior financial services analyst at S&P, which has assigned the company a "AA-" rating.
"Whether you are looking at the price of their long-term debt or the credit default swap market, they are trading like a single-A company," Azarchs said. "I have been deluged with calls."
Moody's last week affirmed its "Aa3" rating with a "stable" outlook and Fitch yesterday changed to "negative" the outlook on its "AA-" rating.
The volume of trading in JP Morgan credit-default swaps has risen in recent weeks to between US$50 million and US$75 million a day, Morgan Stanley's Pohly said.
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