JP Morgan Chase takes $400m surety bond hit

JP Morgan Chase has settled its high-profile legal dispute with 11 of the world’s leading insurers, over payment of surety bonds issued by the insurers that guaranteed prepaid commodity forward contract obligations between now-bankrupt energy trader Enron and Mahonia, a Jersey registered entity set up by the bank.

JP Morgan Chase will receive 60%, or $579 million, of the $965 million principal amount written by the insurers. Its general counsel, William McDavid, said in a statement that while the firm believed it had acted appropriately regarding the transactions struck with the insurers, “given the uncertainty of jury verdicts in complex matters, we believe it was prudent to accept this settlement”. As a result, JP Morgan Chase will take a pre-tax charge of around $400 million in its fourth-quarter 2002 earnings, or $260 million after tax.

The bank sued the insurers, which include subsidiaries of Chubb and Allianz, late last year. The case only came to court during the past month, with the parties reaching settlement late yesterday. The insurers had claimed that the bank used the complex commodities deals to hide loans to Enron between 1998 and 2000. JP Morgan Chase countered that the insurers were trying to avoid payment that covered the deals, and knew all along that they were participating in financing Enron.

JP Morgan Chase also said it had put aside $900 million in reserves to cover potential costs from a raft of private litigation and regulatory probes related to Enron and other matters. The amount includes the $80 million the bank will pay as part of a $1.4 billion settlement reached by the top 10 Wall Street investment banks and regulators following probes that they failed to employ proper barriers between their investment banking and equity research business units in the late 1990s. JP Morgan Chase’s payments were far lower than some of its rivals, with Citigroup Salomon Smith Barney facing the biggest bill at $400 million.

The deal with the insurers does not include a dispute related to a pre-paid contract that was backed by a letter of credit (l/c), JP Morgan Chase said. This £165 million l/c backed an Enron-related swap and was written by “a European financial institution”, according to the bank. Those close to the deal told RiskNews that the counterparty was West LB, but the German bank has consistently declined comment on the matter. JP Morgan Chase said its capital base remained strong and its tier 1 capital ratio on a pro forma basis would have been 8.4% on September 30, 2000.