Gold & J P Morgan

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    New Monsters Inc. on Wall Street:
    Credit risk, derivatives in J.P. Morgan horror tale

    By Thom Calandra, Editor
    Wednesday, Sept. 18, 2002

    "It's fitting the nation's second biggest bank chose the DVD
    debut for the film "Monsters Inc." to unveil its own monster

    J.P. Morgan Chase gets other monikers, half a day after it
    pointed to poor prospects for its cartoonish portfolio of loans,
    some $12 billion worth to cable and telecom companies.

    One of them is the "Sinking of the U.S.S. Titanic." Bill Murphy,
    editor of, for months has been
    pointing to the bank's vast position in derivatives as a
    sinking ship for investors.

    "Not pretty," Murphy tells me from his Texas office. The New
    York bank has, by some estimates, more than $20 trillion of
    customized and other derivatives on its books. The Office
    of the Comptroller of the Currency lists J.P. Morgan Chase
    as the largest holder of gold derivatives, such as
    deferred-sale contracts and other hedged instruments,
    swaps, and futures-linked devices that gold companies
    and central banks used to generate extra income during
    gold's descent in the decade of the '90s.

    The faltering bank is regarded as one of the largest
    dealers in the lending of gold, a practice that generated
    steady profits when gold prices were (until this year) falling
    and interest rates were higher than they are now.

    In the world of derivatives, about 2 percent of a bank's total
    exposure is seen as at risk in the normal course of business.
    In the case of J.P. Morgan Chase (stock market capitalization:
    $37 billion), 2 percent of $20 trillion comes to about $400

    "It might help to keep in mind that it was the tanking of the
    share price of Enron that set in motion their serious problems
    with counterparties," Murphy says. "That is what bankrupted
    Enron. They could not hold on any longer. Ironically, I think it
    was the breaking of the $20 price level that did Enron in."

    J.P. Morgan, its shares below $20 Wednesday, saw its
    counterparty credit ratings lowered to single-A-plus/A-1
    from double-A-minus/A-1-plus at Standard & Poor's. A
    long-term counterparty credit rating was also lowered.
    Fitch, another agency, also lowered ratings. Generally,
    central banks and governments require AA ratings from
    their big-bank counterparties in the swapping of loans,
    paper, and in other transactions.

    "Let's see how Morgan's announcements affect the
    entire financial section," says Murphy, a former
    commodities trader who is lauded by the pro-gold
    followers to his subscription service yet dismissed as
    a fanatic on Wall Street.

    "A panic shouldn't be too far away," says Murphy, who
    has been joined in his concern about gold derivatives
    and manipulated gold markets by a growing number of
    precious-metal fund managers. "It will also be interesting
    to see how the yellow metal reacts. Hold tight, and batten
    down the hatches."

    On Wednesday morning, James Moore of gold news
    service reported traffic on its
    Web site was 25 percent above normal. "This is sometimes
    an upside indicator," Moore says.

    Gold on Wednesday morning rose as high as $321 an ounce
    in the spot market -- up from about $317 before J.P. Morgan's
    bombshell. Gold since Jan. 2 is up 18 percent from the $270

    J.P. Morgan shares Wednesday morning were down 12
    percent to $19. Bernie Schaeffer of Schaffer's Investment
    Research tells me there is the equivalent of almost 2 million
    shares of the Sept. $20 put contracts in open interest. The
    contracts, which rise as J.P. Morgan shares sink, expire

    "Normally, there is a very vigorous defense of these strike
    levels, with big put open interest by the put sellers to save
    themselves from big losses," says Schaeffer. "In other
    words, stock is bought to help keep the shares above
    the strike."

    Schaeffer says a $20 J.P Morgan stock price already has
    significant psychological meaning for investors. "There's
    nothing nice about one of the lower probability scenarios,
    which cannot be dismissed: a plain old meltdown,
    especially if the July 24 low at $18.22 gets taken out. And
    this is a nightmare whether it happens this week or down
    the road," Schaeffer says from his Cincinnati office.

    J.P. Morgan is a member of the Dow Jones Industrial
    Average, a price-weighted index destined for steep falls
    in coming months."
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