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Derivatives

JPMorgan Spreads Widen On Handful Of Concerns

Credit-default protection on JPMorgan went on a wild ride last week, widening out by more than 50% at one point. Midmarket five-year default swaps were trading at 100 basis points late Wednesday in New York, up from 70bps at the start of the week. The swaps widened to as high as 110bps Tuesday, when the company's stock also had a double-digit drop.

Traders said several factors contributed to the wider spreads: A U.S. Congressional investigation into Enron's collapse last week accused JPMorgan and other firms of helping create special purpose vehicles that masked Enron's true debt situation. And WorldCom's bankruptcy over the previous weekend did little to assuage fears about the credit quality at JPMorgan, one of its biggest lenders. Furthermore, the U.S. equity markets got hammered at the start of last week and the primary fixed-income market dried up. "There's a lot of negative issues facing the money center banks right now," noted one trader, adding volumes in JPMorgan were unusually high, although he was unable to quantify that claim.

Bob Swanton, managing director and North American practice leader for financial institutions at Standard & Poor's in New York, said investors seem to be re-rating the company's credit position in light of these factors. "Above all the potential financial consequences of legal action [relating to Enron], there's obvious reputational damage," he said. And as a securities powerhouse, JPMorgan is also suffering from broader trends. "In addition, there's the capital markets malaise, in equities and fixed-income, which is not getting any better and in many ways is getting worse," Swanton said.

S&P has a AA rating on JPMorgan, with a negative outlook, while Moody's Investors Service has it at Aa3.

Five-Year protection On JPMorgan

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