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. Last Updated: 07/27/2016

Bankruptcies Dog J.P. Morgan

NEW YORK -- After a string of losses and bad publicity, J.P. Morgan Chase finds itself on the defensive.

The company has large loans to Enron, Kmart and Global Crossing, all now in bankruptcy, and additional exposure in Argentina. Its large portfolio of venture capital investments continues to fall in value, although some of those losses are hedged, stock analysts said.

Noting that the bad loans account for just a small percentage of the company's total loans, J.P. Morgan's executives have been reassuring employees in recent weeks and telling investors that the market's anxieties about the company are overblown.

"Yes, we had problems in 2001, and we are addressing them," said William Harrison Jr., J.P. Morgan Chase's chief executive, in a Feb. 4 memo to employees. "In the face of the publicity surrounding these issues, though it's very important to put them in the context of the firm's overall performance."

Several Wall Street analysts have become convinced that the bank's shares, down 12.4 percent this year, are relatively cheap. The stock, which closed at $31.84 on Monday, is trading at just 10 times this year's expected earnings, according to estimates by Ruchi Madan, a stock analyst at Salomon Smith Barney, who rates the company a buy.

Still, even optimists say J.P. Morgan's stock is unlikely to rally until the economic environment improves investment banking, lending and other services for corporations, which represent a majority of the bank's revenues.

Once the economy recovers, things won't look so dire," said Steven Wharton, an analyst for Loomis, Sayles & Co., which owns J.P. Morgan shares. "The question is whether J.P. Morgan can weather the near term, because obviously that will be difficult."

J.P. Morgan's management, busy smoothing out the September 2001 merger of J.P. Morgan and Chase Manhattan, must assuage cautious investors, some of whom are worried that the bank will cut its dividend. The losses reported by the bank in the last quarter mean it had to dip into its capital to pay dividends. With a yield of over 4 percent, the stock has been attractive in a time of falling rates.

In the short term, the bank can do little to revive the markets for stock offerings or acquisitions, although it has been aggressively cutting expenses in its investment-banking business. As the biggest lender to corporations, according to data from Loan Pricing Corp., it inevitably faces losses when bankruptcy filings by big companies rise.

Still, even a string of corporate defaults will not put the company at risk. J.P. Morgan typically sells most of the loans it arranges to other lenders, a strategy that limits its prospective losses from any single bankruptcy. While the bank wrote off $982 million in loans and trading losses last year, the writeoff represented less than 1 percent of all its outstanding loans, Harrison told employees.

J.P. Morgan's derivatives business, which Madan estimated accounted for 15 percent to 20 percent of its earnings last year, also has some investors nervous. The company filed a lawsuit to recover nearly $1 billion related to a commodities swap with Enron. J.P. Morgan considered itself insured against any losses on the deal, but the insurance companies are refusing to pay.

"The implications of this lawsuit could be broader," said one hedge-fund manager who invests in financial-services stocks. "They are the largest participant in the credit derivatives market. How much of their portfolio involves things like this?"

A spokesman for J.P. Morgan, Joseph Evangelisti, pointed to statements by executives at the time of its earnings report noting that this type of insurance was not commonly used by the bank to hedge against potential losses.

"There is definitely an Enron cloud over J.P. Morgan right now," said Timothy Ghriskey, who runs Ghriskey Capital Partners, an investment firm in Greenwich, Connecticut. He sold the bank's shares last October and is not immediately tempted to buy more, even though he thinks the stock is cheap. "There still could be more storm clouds on the horizon," he said.

Another source of worry for investors is JPMorgan Partners, venture capital subsidiary, which has posted losses in five of the last six quarters.

J.P. Morgan Chase had tried to minimize its losses last quarter by betting on a decline in the Nasdaq 100, but the index rallied at the end of the year. Madan said that after write-downs last year and with another new hedging strategy, the bank's losses on the portfolio should be smaller this quarter. J.P. Morgan had a total net loss of $332 million, or 18 cents a share, in the fourth quarter.