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Mix-Ansicht- Einer für Dottore - XERXES, 12.11.2002, 10:32
- Re: Rumours like old soldiers: they never die, they just fade away... Thx! (owT) - dottore, 12.11.2002, 11:20
Einer für Dottore
-->The rumour that won't die
Investors keep worrying about J.P. Morgan's gold hedging exposure
Steve Maich
Financial Post
Friday, November 08, 2002
The rumour that J.P. Morgan Chase & Co. is facing massive losses on gold derivative exposure is the market conspiracy theory that will not die.
J.P. Morgan insisted yet again yesterday that its derivative exposure remains minimal, calling the latest rumours"false and irresponsible." But that didn't stop investors from driving the shares (JPM/NYSE) down 6.6% yesterday.
Despite the denials, thousands of investors and analysts suspect J.P. Morgan has more on the line than it's letting on. Just as they did when Barrick Gold Corp. and Placer Dome Inc. slipped last summer on concerns about their extensive hedging strategies, investors are complaining about a lack of transparency in derivatives trading, and a general distrust of complex financial structures.
One former brokerage credit officer, now working as an independent analyst, said the market has very little faith in assurances about risk exposure when they aren't backed up by hard data.
"To see what some of these companies have as real exposure and then hear their public statements, it just boggles the mind sometimes," he said."You just don't know, and that's the point."
J.P. Morgan became heavily involved in forward gold contracts in the 1990s when the commodity price was in a slow decline. Market watchers at the time said gold was going nowhere in the new global economic environment, and the derivatives market allowed banks like J.P. Morgan to extract profits from a marooned asset class.
As far as most analysts are concerned, J.P. Morgan's massive derivatives program amounted to a short position on the price of gold. And with gold prices up 17.5% in the past year, speculation is swirling that the bank is now taking a serious pounding.
How big the losses are, is a matter of endless debate.
David Hendler, a bond analyst at Creditsights Inc., an independent research firm in New York, discussed the gold question in a Sept. 23 report to clients. He concluded that there is not enough public information released by the bank to precisely determine the risks, but there are a few clues that suggest reasons for concern.
First and foremost is J.P. Morgan's extensive participation in the derivatives market, he said. In all, the bank holds about US$26-trillion in futures and options contracts, or roughly 50% of the overall market. That's more than twice the size of the entire annual U.S. gross domestic product.
J.P. Morgan has reduced its gold contracts over the past year, but it is still relatively overexposed compared to other major banks, Mr. Hendler said. At the end of the second quarter Morgan's gold contracts were worth US$45-billion on a notional basis. Citigroup, the largest financial services company with about 50% more total assets than J.P. Morgan, has just US$12-billion in gold derivatives.
Notional value isn't a true reflection of the bank's risk, because it refers to the potential maximum value of a contract. But even a writeoff of 5% of its total gold contract would represent a loss in excess of US$2-billion, greater than the bank's total net income in 2001.
Like all banks, J.P. Morgan has stress-tested its portfolio and insists that even in its worst-case"value at risk" scenario, its gold contracts would cut just US1¢ per share from its 2003 earnings. But, like all banks, it refuses to go into the specifics of trading strategies, or how they arrive at their risk models, as these are proprietary secrets.
If the denials are starting to ring hollow, it's because J.P. Morgan has had to issue so many of them in recent months.
The bank is trying to recover US$965-million in losses from doomed derivatives transactions with Enron Corp. The insurance companies involved maintain the deals were tantamount to fraud and they've refused to pay. The bank also faces a variety of lawsuits arising from its role as financier to Enron and WorldCom Inc. The bank has denied all allegations of wrongdoing, and so far hasn't taken a provision for the potential losses, insisting that they'll be vindicated.
Back in July, Kathy Shanley, an analyst at Gimme Credit, an independent bond research firm, said"there is no way to responsibly quantify the ultimate financial impact of the current investigations."
J.P. Morgan is also at the centre of a Securities and Exchange Commission investigation into allegations that the bank forced clients to buy more shares of bank-led IPOs in the after market to ensure new issues surged in their first few days of trading. Again, executives have denied the charges, but investors are well aware that Credit Suisse First Boston paid US$100-million last year to settle similar charges.
For a bank that saw third-quarter profits plunge 91% thanks to a slew of credit writeoffs, all the outstanding questions are creating an unappealing picture.
In an environment like this, whispers about multi-billion dollar derivatives losses are finding fertile ground among nervous shareholders.
smaich@nationalpost.com
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