Banks fall as Congress probes Enron ties

Financial Times ^ | July 23 2002 19:26 | By Gary Silverman in New York and Lydia Adetunji and Peter Spiegel in Washington

[Don Myers]

Yes, it is true that we don't hold the high-flyers accountable. It is time that we start putting a few in jail. That won't bail us out of trouble, though.

[Mike K]

I'm pasting a pertinent reply from another thread. Remember there's a Federal Reserve office in Dallas if money gets tight. Thanks to BillyJack, see below:

http://www.financialsense.com/Market/daily/monday.htm

"J.P. Morgan Chase, Citigroup, and Bank America are also the nation's largest writers of derivatives. These three banks have derivative portfolios totaling close to $40 trillion in notional value or roughly 87 percent of the derivative portfolio of the nation's top 354 banks. This is a high concentration in just a few players in what is a very risky business."


Danger in Derivatives
The media attention has been on the companies that have defaulted on their loans or have filed for bankruptcy protection. To a lesser extent, the attention has been on the banks. A credit bubble has two sides to the equation: the borrower (Enron, Global Crossing, Kmart WorldCom) and the lender (J.P. Morgan Chase, Citigroup, Bank America). Banks have not only been the lender and underwriters on much of this debt, they have also been the writer of derivatives that go hand-in-hand with the expansion of credit. In fact, bank derivative growth has been growing at double-digit rates over the last decade. During the first quarter of this year the notional value of derivatives in bank portfolios increased by $946 billion. Interest rate contracts increased by $972 billion to $39.3 trillion. So in addition to the debt debacle, you also have the danger of another derivative debacle such as we had with LTCM back in 1998. Many of the top banks such as J.P. Morgan Chase, Citigroup, and Bank America are also the nation's largest writers of derivatives. These three banks have derivative portfolios totaling close to $40 trillion in notional value or roughly 87 percent of the derivative portfolio of the nation's top 354 banks. This is a high concentration in just a few players in what is a very risky business.

On top of making bad loans, the banks also have exposure as the largest underwriters in the derivative business. J.P. Morgan Chase is leveraged over 700-1 when you look at the bank's exposure to derivatives. The net equity of JPM has to back those derivatives. If you look at J.P. Morgan Chase’s derivative book, the bank looks and acts more like a hedge fund then it does a pillar of stability of the financial establishment. The credit problems are only one side of the problem. No one knows what the bank's derivative risks are other than that they have $23.4 trillion in derivatives against equity of around $40 billion.

This isn’t the only problem the bank has at the moment. J.P. Morgan Chase and Citigroup made $5 billion in cash loans using complex transactions that were disguised as energy trades. This made the loans hidden from Enron’s balance sheet. Investigators found out that J.P. Morgan and Citigroup were Enron’s main source of prepay funding. The Senate Governmental Affairs subcommittee is now looking into the extent to what these banks knew and the role they may have played in aiding Enron’s accounting deceptions. J.P. Morgan promoted prepay loans to customers in the 90’s because of their “balance sheet friendly” nature. In addition to the Senate, the Manhattan’ district attorney’s office is looking into the role J.P. Morgan Chase played in making offshore loans to companies in an effort to keep the debt off the balance sheet. Insurance companies, which issued surety bonds as guarantees that Enron would repay its offshore loans, are now suing the banks because they claim the banks kept knowledge of the company’s perilous financial condition from them."


10 posted on 7/23/02 7:22 PM Central by BillyJack
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[OldFriend]

There must be consequences...........or the markets are finished. Everyone is beginning to understand that small fact!

[Don Myers]

Many people have their retirement funds tied up in stocks. My in-laws do.

[My Favorite Headache]

Call in the Wolf

[TennesseeProfessor]

The $500 million is a real number, the $650 I made up. A different shady deal with JP Morgan had an effective intrest rate of about 7.5%, so I would guesstimate $530 in "oil".

[CyberAnt]

I have trouble with your analogy doesn't line up with the scripture which says, "I will bless those who bless you". God said this to Abraham. Since we have gone out of our way to bless Israel, I don't think we have a very big a$$-kicking coming. Also ... what about: "But God, who is rich in mercy ..."

[Tauzero]

LOL!

[ladyinred]

In my opinion, these RATS are going to bring this nation down in their effort to destroy the President. We have laws, if these people broke them, try them in a court of law.
This 24/7 media blitz has got to end and end now.

[Mad_Tom_Rackham]

I may slip down to the bank tomorrow and withdraw a little cash.

And miss out on that 0.75% interest?

[CyberAnt]

And ... the talk has been that the dems are overjoyed over the market going in the tank. Gebhardt reportedly said that if the market tanked, the dems could pick up 30-40 seats in the House.

If the dems are truly happy about the market slump, then the bank failure could play into their hands,

or ... the bank failure could really expose their agenda to the public. Of course, I'm voting for the second option.

[Vets_Husband_and_Wife]

Interesting you should mention cash. We JUST did that. Based on a program we watched with regard to security (It was either Dateline or 60 mins, I can't remember).

Having 45 days of cash, water and readily available food is considered wise for security reasons. In otherwords, if anything should ever happen in your area, you should have enough of the above to get through 45 days. The government will not be able to assist every citizen. Perhaps the Mormons are on to something? Not a bad idea,..and what is the harm vs the good?

Especially so, considering what is coming to light with corporate America and the banking industry. I'm not saying we don't need corporate America, WE DO!! Our entire economy relies on them being successful. But what has happened, has dire consequences. Already Foreign investors are pulling out. The new EU will be the ones who profit from this. There are warning signs everywhere.

I feel really sorry for President Bush, I said on our profile (right after he was elected) that he was inheriting a mess. I never imagined how prophetic those words would end up being. Clinton was an even bigger disaster than many of us had ever imagined. Yet they (The liberals and the liberal media) have the audacity to think we would fall for them blaming a new administration. How stupid they must think we all are.

How in the world could any administration make this kind of mess happen so fast. Governments and the World as a whole simply don't move that fast. The affects of governing take a few years to produce results. We are seeing the results of the biggest NON PRESIDENCY in the history of the US. No one was on watch.. and we are paying for it.

Sadly,.. all Americans will learn and suffer for the idiotic choices of a greedy few. (Meaning those who voted for the Clintons.. remember, we got TWO for the price of one?? Sad day for America)

Get the cash out.

We pray every night that the American public will understand what is going on.

God Bless this administration, never in our history has an administration faced such a multitude of horrendous situations. Hold on.. the ride just got wilder. Who'da thunk it?

[ladyinred]

I hope this backfires on the rats. I am just furious tonight, in fact, so angry that I shouldn't be posting at all! Sometimes it is hard to be a lady you know. :)

[TennesseeProfessor]

To clarify, the $500 million is just one transaction. The total hidden debt is in the $billions.

[DB]

Worry about deflation not inflation.

[DB]

The EU's markets are falling faster and further than the American markets. The EU is in no better shape than we are and in some ways much worse.

[DB]

The Clintion bill is coming due...

[cavador]

It's people like YOU who create panic in the stock market.
What's wrong with leaving your money there.I can assure you ;the market will bounce back again,It's just a passing phase and given time the stocks will rise again.

Every time there is a panic it affects markets worldwide and drags the AUSSIE dollar with it.