J.P. Morgan Chase & Co. was deeply involved in Enron Corp.'s finances, simultaneously investing in the company, buying Enron stock for funds it managed and recommending the energy company's stock to investors.
The bank's complex involvement with Enron was not unique. Citigroup, Merrill Lynch & Co., Credit Suisse First Boston Corp. and Morgan Stanley Dean Witter & Co. are among firms that had many-sided relationships with Enron, according to Enron's records and those of the other companies.
Congressional investigators and shareholders' attorneys are examining how big a role those Wall Street bankers may have played in Enron's rise and fall and the impact on investors. On Wednesday, an analyst from J.P. Morgan will join representatives from five other banks before the Senate Government Affairs Committee to answer questions about their ratings of Enron.
J.P. Morgan's Enron investments meant that the bank would benefit if the Houston company's stock price rose. Its purchases of Enron's stock and "strong buy" recommendations boosted share prices. At the time J.P. Morgan analysts recommended Enron stock, other bank officials knew that the energy company had major off-balance-sheet debts. The bank also was a major investor in one of Enron's largest outside partnerships, LJM.
J.P. Morgan's general counsel, William H. McDavid, said the bank handled its many ties to Enron correctly. "Obviously we played multiple roles in connection with our work on Enron matters, and we believe that the potential conflicts of interest were properly managed," McDavid said in an interview.
McDavid said J.P. Morgan's analysts were not permitted to get significant financial data about clients obtained by J.P. Morgan bankers, such as confidential information about off-balance-sheet debt. No exchange of information is permitted between investment managers who buy and sell shares for clients and the rest of the firm, McDavid said.
Lawyer Jacob Zamansky, who often represents shareholders, said J.P. Morgan's failure to disclose information to investors about the partnerships and Enron's financial picture could leave the bank open to lawsuits.
"They had detailed knowledge of Enron's poor financial condition at the same time they were recommending that the public buy the stock," he said.
John Coffee, a Columbia University law professor, said it may be difficult to show in court that stock analysts were at fault. But Coffee said the examination of the relationship between J.P. Morgan and Enron could prompt new conflict-of-interest regulations.
Scrutiny of J.P. Morgan Chase's relationship with Enron and its loan exposure to other troubled companies has taken a serious toll on the bank's stock and bond prices. Shares in the company closed at $28.19 yesterday, down 3 percent for the day after dropping as much as 8.4 percent on heavy volume. The bank's shares are down 42 percent in the past year, more than any other stock in the Dow Jones industrial average.
The company's bonds have also dropped in price and increased in yield. And credit rating agencies have stepped up their scrutiny. On Thursday, Fitch Inc., one of three dominant national rating agencies, revised its outlook to negative for the bank.
J.P. Morgan Chase, like other Wall Street firms and credit rating agencies, says it was caught by surprise by Enron's sudden collapse, as shown by its $1.9 billion in claims against Enron in bankruptcy court.
"Even the people who knew a lot still believed this was a very good company until very late in the process," said J.P. Morgan Chase spokeswoman Kristin Lemkau.
J.P. Morgan Chase was one of Enron's lead bankers, raising billions of dollars for the company's expansion
Over the past three years, J.P. Morgan also helped Enron line up $1 billion in bank financing, with the money traveling to Enron through a chain of "special-purpose entities" named Sequoia, Choctaw, Cherokee and Cheyenne. The structure was designed to reduce the debt on Enron's books -- a critical factor in determining its credit rating.
Attorneys in the Enron bankruptcy proceeding say that structure also may have permitted Enron to avoid disclosing the Sequoia obligations. However, the strategy may have backfired: Because of the way the loans were set up, Enron was still holding on to a $1 billion loan due to be repaid at the end of November when it sought bankruptcy protection on Dec. 2, a Sunday.
J.P. Morgan has filed suit in bankruptcy court on behalf of itself and the other Sequoia lenders to recover the $1 billion.
Enron used an offshore corporation named Mahonia Ltd., which was closely tied to J.P. Morgan, to buy and sell natural gas. Some insurance companies contend that the trades were really loans. Enron and Morgan have denied the claim.
Meanwhile, J.P. Morgan's stock market research analysts rated Enron a "strong buy" until mid-October, when the stock began its death spiral, and at various times Morgan investment managers purchased Enron shares for some of the funds they ran.
Morgan and Citigroup, a second lead Enron lender, also stood to divide $90 million in fees if Enron's acquisition by Dynegy Inc. had gone through in November, according to court filings.
The SEC is considering new rules that would prohibit analysts and asset managers from reporting to investment bankers. Other proposals would reimpose more distinct separation between investment banking and asset management. The securities industry, however, said a reintroduction of such divisions could create market inefficiencies and block information on a company's problems that analysts and fund managers need to do their jobs.