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There's No Exit For Morgan-Chase's $29 Trillion Derivative Exposure
Is J.P. Morgan Chase too Big to Fail?

This question is admittedly a bit premature. But you can bet this concern will start going around in the next few weeks if the giant New York bank continues its recent streak of bad luck. Back in early December this column speculated that Global Crossing Ltd. would be the next Enron, bitten by the bankruptcy bug. That happened this week as Global entered a pre-packaged bankruptcy with a couple of Far East firms. In that December column I also speculated on the much more important aspect of Global Crossing's problems - that J.P. Morgan Chase, Citicorp and BankAmerica were each lead bankers for one part or another of Global's borrowings. Global is said to have spent $15 billion in five years building a fiber-optic cable network around the world. Those banks largely got the money together, including putting in a lot of their own. Even though other banks were lured in by Global Crossing's pitch, the focus will be on J.P Morgan Chase mainly because the company has been bathing in misfortune lately - having been heavily involved in Kmart and Enron as well. The Chase part of the organization, meanwhile, made heavy and risky bets in the dot.con bubble a couple years ago. And we all know how that turned out. Those losses were one of the reasons Chase ended up in a merger with J.P. Morgan. And if corporate failures weren't enough, J.P. Morgan Chase also was heavily involved in the banking situation in Argentina. Could all of this lead to a big problem? Yes. Could all of this lead to - just perhaps - the failure of J.P. Morgan? Probably not, but only because the giant banking conglomerate is too big for Washington to allow it to fail.

PNC Bank this week shocked Wall Street by increasing its losses, mainly because of deficits that lay hidden off its main books. PNC, unlike J.P. Morgan Chase, isn't that important to the U.S. financial system. But the fears are similar. Charles Peabody, one of Wall Street's best banking analysts, agrees that J.P. Morgan Chase will be preserved by the government, if it ever comes to that. "But that doesn't mean it won't be a $10 stock." J.P. Morgan's shares were selling at $33 yesterday. But that's down from over $40 in December. The stock had been this low before: during the terror scare in September. Although it still recommends the stock, Merrill Lynch this week reduced J.P. Morgan Chase's forecast because it felt expenses would be higher than expected. But what has the pessimists worried, very worried, is that some banks - think PNC - haven't been forthright in their financial reporting. Part of this is just a general concern about bank accounting, but it also has something specific to do with J.P. Morgan Chase itself. Yesterday, for instance, J.P. Morgan Chase told Argentine authorities that a bank it co-owns down there may have broken the law by illegally moving $260 million overseas as that country's troubles increased. Peabody, who works at a investment boutique called Ventura Capital, recently laid it all out for his clients. "I remain convinced that J.P. Morgan Chase will emerge as the poster child for what ails this economy - excessive leverage, financial engineering, aggressive accounting and conflicted interests."

Card-House of Morgan

It is hardly a coincidence that bullion prices zoomed to $300 on the day that J.P. Morgan Chase shares came crashing through their September lows. As I wrote here the other day, Morgan's problems could eventually dwarf those of Enron. They are bound up together right now, to the extent Morgan - the largest lender in the world to U.S. firms - supposedly has Enron exposure that exceeds $2.3 billion. However, as my recent note here suggested, the banking giant's risk in the derivatives markets could be considerably higher, since it holds leveraged debt paper with a notional value exceeding $30 trillion. You'd think things could not get much scarier than that, but on Tuesday - with gold prices soaring - they did. As it happens, Morgan is a big player in the gold market, mostly by way of bullion loans that work best when gold prices are weak.