Risky Business
J.P. Morgan Chase took a hit in the recession. It took another hit on Enron. The deeper problem, though, goes further back.
FORTUNE
Monday, April 15, 2002
By Shawn Tully

You'll have to forgive William Harrison his optimism. It's in his constitution. As a forward for the University of North Carolina basketball team, the lanky, 6-foot 4-inch Tar Heel was prized more for his slam-dunk enthusiasm than for his jump shot. You can hear the same rah-rahs echoing from the rafters when the genial 58-year-old CEO talks about his current 100,000-member team, J.P. Morgan Chase."It's clear as a bell that our platform will win, that our stock is very undervalued, that we'll create great value for shareholders," he says, with nary a hint of self-doubt.
The shot clock is ticking, however. Despite some recent gains, Morgan's stock price has been bludgeoned over the past year and a half. Since September 2000, when the marriage between the Chase Manhattan Corp. and J.P. Morgan & Co. was announced, shares of Chase (which became JPM) have fallen 37%, to $36. More than $40 billion in market value has been erased from the combined companies. That market slide is all the more significant given that bank stocks, in general, have held up well during this down market. The Dow Jones Bank Index has risen 6% in the same period, while the BKX, a proxy for larger banks, has stayed flat. Meanwhile, shares of Bank of America, another huge hybrid of commercial and investment banking, have jumped 22%.
On top of that, Morgan has taken a financial--and reputational--wallop from its connection to the Enron mess. And the bank may, in fact, face more exposure to future credit bombs.
As we said, you'll have to forgive Harrison's optimism. The question is, Why is Wall Street's buy-side establishment cheering alongside him? No fewer than 14 of the 21 analysts covering J.P. Morgan garland the stock with buy or strong buy recommendations. (Only two have sells.) Judah Kraushaar, Merrill Lynch's veteran banking analyst, describes his faith with a kind of Zen-like calm. Learning to appreciate this banking powerhouse, he writes, is"learning not to fear one's shadow... J.P. Morgan Chase's franchise [is] far more solid than many bears assume."
The gushing has everything to do with size, it seems. On paper, J.P. Morgan Chase is a banking Goliath--ranked No. 1 in the world in arranging syndicated loans for corporations, standing first in derivatives and fourth in bond underwriting. It boasts the world's second-largest private bank (UBS holds the top spot) as well as the fourth-biggest asset management franchise.
Harrison, a deft diplomat who orchestrated Chemical Bank's mergers with, first, Manufacturers Hanover, and then Chase in the early to mid-1990s--before uniting with J.P. Morgan--has been building this empire into a one-stop financial shopping mall. For a while Wall Street applauded; the stock soared from the winter of 1998 to mid-2000. And indeed, Harrison's strategy certainly looks compelling. Companies, he says, want to concentrate their dollars by buying a panoply of services from fewer, bigger banks. Morgan has the edge on traditional investment firms like Goldman Sachs, Harrison argues, because it provides what corporate clients covet most--plentiful credit. Using loans as a calling card, Morgan can swipe the more lucrative M&A advisory and underwriting business from the gilded leaders."When we provide capital to clients, we provide something of great value to them," Harrison boasts."Evidence is strong they like this model. It's what big companies want."
Here, Harrison is unequivocally right. The model does work. Citigroup is proving it every day, using its big balance sheet to elbow into higher-margin investment-banking business. But so far at least, the same has been less true for Morgan.
Despite Harrison's finesse in cobbling together megadeals and melding corporate cultures, despite his rousing boosterism and ueber-charm, despite choosing what would seem to be the right growth strategy for his company, this CEO power forward has failed to sink the ball."Too many things went wrong with J.P. Morgan that didn't go wrong with its competitors," says fund manager Mike Holland, who dumped the shares this year. Morgan stands as a classic example of how gaining immense size and following a logical strategy don't necessarily enrich shareholders.
When Chase bought J.P. Morgan in late 2000, for $33 billion, Wall Street buzzed over the yawning upstairs/downstairs gulf in cultures--the prospect of flying plates when the cerebral, upper-crust bankers from the House of Morgan shared the table with the roughhewn folk from Chase. It was finesse vs. brute force, suspenders vs. shirtsleeves, hand-tooled service vs. ATMs and credit cards.
But the lore lovers missed the real drama. The tension between Chase and Morgan wasn't about cultures; it was about risk. The merger brought together two diametrically opposed views of risk management, one swashbuckling (Chase), the other hyperdisciplined and scientific (Morgan). Clearly they could not coexist, and in the immediate aftermath of the merger a battle erupted internally over which view would prevail.
For the old J.P. Morgan, making loans was a mug's game. Like Chase, J.P. Morgan had used corporate lending as a way to to build its investment-banking business. But in the late 1990s, J.P. Morgan reversed course. It reckoned that the potential cost of those loans far outweighed the loans' value as an investment-banking entree. The loans provided tiny profits in good economic times--but in tough times the losses could swamp the puny earnings from the lush years. What especially spooked J.P. Morgan was the hit it took in 1997 from the Asian debt crisis. The lesson was clear: Financial earthquakes can roil credit markets overnight, in ways no expert can predict.


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