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Derivatives

JPMorgan Widens After Earnings Warning

Credit-default protection on bulge bracket firm JPMorgan Chase widened as much as 20 basis points last week, after the second-largest U.S. bank warned that third-quarter earnings would lag second-quarter results because of weaker-than-expected trading profits and bad loans. Five-year default swaps were trading at 95 basis points Wednesday, up from 75-80bps before the announcement, according to traders. Volume was very high, with one trader at a large U.S. dealer reporting he had done USD60 million in JPMorgan trades on Wednesday alone, compared to a daily average of USD5-10 million.

But, contagion was nonexistent as spreads on other financial institutions, such as Citigroup, did not move wider and Bank of America protection actually tightened three basis points to 42bps. "The market used JPMorgan as a buying opportunity to take exposure in other credits," said one trader. Despite JPMorgan's poor results and Standard & Poor's resultant one-notch downgrade to A plus, traders said the bank's status as a major derivatives counterparty should not be affected so long as it stops the ratings slide.

John Otis, a credit analyst at Deutsche Bank in New York, said in addition to the poor results, ongoing litigation and a government inquiry into JPMorgan's dealings with Enron are not helping matters. But he scoffed at talk that the 2000 merger between JPMorgan and the former Chase Manhattan has been a flop and added that given the bank's huge role in the U.S. banking system he doubted there is risk of another downgrade. "I think the ratings are getting to a safe point, I don't think the government would want to risk it going that much lower," he said. As of late Wednesday, Moody's Investors Service rated JPMorgan one notch higher than S&P, at Aa3.

Five-Year Credit Protection On JPMorgan Chase

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