Weighed down by a troubled loan portfolio, a depressed market for its investment banking business and a demand by investors for better results, William B. Harrison Jr., the chief executive of JP Morgan Chase, appears to have backed himself into a corner.
After nearly two years of mostly disappointing results, the bank's stock has slumped almost 40 percent this year alone -- more than three times the drop of its benchmark index.
PHOTO: NY TIME
Investors want JP Morgan to put the past behind it, rid itself of problem loans and investments and start fresh. It could begin, they say, by selling its worst holdings in the telecommunications industry and taking yet another charge against earnings before the end of the year.
But the bank, which made many of those investments at or near the peak of the market, is resisting selling them at or near the bottom. And it is chary about antagonizing the credit rating agencies, which have already cut the bank's creditworthiness because earlier writeoffs have eaten into its capital. Giving up on more loans could send the bank's debt ratings even lower, raising costs and crimping its trading operations.
"You can see that they are hamstrung," said Thomas M. Finucane, an analyst with State Street Research.
Harrison is pleading with investors to be patient, insisting that the bank's corporate lending and investment banking businesses will revive when the economy does.
But, as the person who is responsible for this mess, his credibility is weak. Investors and analysts are not in the mood to cross their fingers and hope for the best. If results do not improve soon, even officials within the bank acknowledge that a management change may be inevitable.
"Management should bite the bullet and cut the dividend and get out of the denial they are in," said Michael L. Mayo, an analyst at Prudential Financial.
He pointed out that the dividend has not changed since just after the merger creating the bank was completed on Dec. 31, 2000, even as earnings have plunged.
"The bank is paying out too great a proportion of its earnings in dividends," Mayo said.
Last quarter, it paid its usual dividend of US$0.34 a share, even though its operating earnings were less than half that, US$0.16 a share. The bank dipped into its capital to make up the difference.
JP Morgan executives, including Harrison, who was traveling and not available to be interviewed for this article, have said they are reluctant to cut the dividend because its relatively high level -- over 6 percent of the share price as of Friday's close -- attracts investors to the stock.
Dina Dublon, the chief financial officer, acknowledged in an interview last week that the bank's position was difficult. "There is no silver bullet" to slay all the bank's demons, she said.
Some professional investors agree, but that is hardly good news for the bank.
Michael F. Price, the legendary value investor who made a fortune for investors in his Mutual Series funds by loading up on Chase Manhattan stock in the mid-1990s, said he was not tempted by JP Morgan even at today's prices. Instead, he recently bought shares of Citigroup.
While Citigroup's shares are also down this year -- they are off almost 22 percent -- Price said he found Citigroup's businesses easier to analyze and value, and its earnings less volatile than JP Morgan's.
"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.
These cuts could run the risk of eliminating revenue-generating capacity when markets eventually recover," wrote Peter Nerby, an analyst at Moody's, when he lowered the bank's ratings last month.
All this would bode poorly for JP Morgan's stock, and a weaker stock could make the bank vulnerable to a takeover and increase pressure on Harrison and his team to resign.
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