Chasing Bad Money

How J.P. Morgan Chase fell apart.

Enron is fading in the popular memory, but for some banks, the bad trip continues. This week, J.P. Morgan Chase is squaring off with a group of insurers in a Manhattan courtroom over $1 billion in claims related to a series of questionable deals that a Chase entity conducted with Enron.

An unfavorable verdict is the latest smack in the head for the venerable Chase. The once-vaunted client list of the No. 2 U.S. bank reads like a parade of horribles. It had the largest exposure of any bank to Tyco, $150 million of WorldCom’s debt, $2.6 billion in loans and other commitments to Enron, and a $900 million exposure to Argentina. Together with Citigroup, Chase helped lead a $2.2 billion loan to Global Crossing. Meanwhile, a good chunk of the bank’s $8 billion venture capital business, the largest such portfolio of any U.S. bank, is tied up in technology detritus. That unit, J.P. Morgan Partners, wrote down $1.3 billion in losses in 2001. In October, as profits fell, the bank’s credit ratings were reduced.

In its defense, J.P. Morgan Chase has tended to shrug. “Extending credit is the business we’re in, and we’re at the point that credit losses are going higher,” Chief Financial Officer Dina Dublon told Business Week earlier this year. True enough. But one might just as easily conclude that Chase is less a victim of circumstance than of poor decisions.

Here it’s instructive to compare Chase with its archrival Citigroup. The two have engaged in an epic, multi-generational grudge match for status and dominance in the global banking business and on the streets of Gotham (call it Banks of New York). While Citigroup has certainly been involved in its share of scandals, most of its problems can be ascribed to the conflicts of interest. Chase’s woes, by contrast, seem to stem from incompetence. Click here for a pocket history of their rivalry.

In the late ‘90s boom, crusty old Chase became a New Economy financier par excellence. Chase Capital Partners became a premier backer of dot-coms, especially the New York-based supernovas like Starmedia.To counter Citigroup’s Salomon Smith Barney unit, Chase paid $1.3 billion for San Francisco technology bank Hambrecht & Quist in fall 1999. A year later, after the bubble had burst, it ponied up a mammoth $33 billion to acquire J.P. Morgan.

As the once-gentlemanly business of providing revolving credit lines evolved into a sharp-elbowed competition to provide investment banking services, Chase embraced the new aggressive tactics. Frequently, loans were seen as a lever to gain more highly profitable investment banking business. 

In the late ‘90s, the most needy borrowers, not coincidentally, also provided the most lucrative investment banking opportunities. Deal-junkie energy traders (Enron), telecommunications infrastructure giants (WorldCom, Global Crossing), and serial acquirers like Tyco—Chase lent to them all with abandon. Of course, anybody who has applied for a line of credit knows that bankers routinely turn down opportunities to lend money. Increasingly, however, Chase abandoned the risk-averse posture of a commercial banker for the transaction-driven mania of an investment banker. Shying away from risky deals would have meant forfeiting lucrative fees and market share to Citigroup, as well as Merrill Lynch and Goldman Sachs.

Now Chase is paying the price for letting investment banking imperatives overwhelm sound lending judgment. Today Chase, with a market cap of $49 billion, is a mere shadow of Citigroup, which is worth $191 billion. As Chase retrenches, slashing jobs and exiting businesses, Citigroup continues to expand through acquisitions. Indeed, despite all the reputational damage it has suffered, much of Citigroup’s core business is sound. The same can’t be said for Chase. And it’s easier to make over an image than a balance sheet.