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JPMorgan Downgrade Prompts Traders To Review Positions

29 Sep 2002

Traders are examining their counterparty risk to JPMorgan in light of a recent downgrade and a statement that the bulge bracket will post weaker than expected earnings. Although the firm is still rated AA minus traders said they are reviewing their collateral agreements with an eye to reducing risk, either by shrinking credit lines or buying credit protection. Eileen Darko, spokeswoman in London, declined comment.

"We would expect increased scrutiny of JPMorgan's derivatives franchise in the near-term," said Henry McVey, equity analyst at Morgan Stanley in London in a research report addressing JPMorgan's earnings announcement.

Two traders said JPMorgan's position as a leading derivatives house could be in question. However, another trader said that it will not be critical unless there are further downgrades as the firm is still in the AA category.

Immediately after the downgrade trading volumes for credit-default swaps referenced to JPMorgan jumped six fold and protection widened to 95 basis points from 75-80bps (DW, 9/23). Traders said it stayed around those spreads until the overall financial sector tightened on the stock market rallied Thursday, bringing the spreads into 90bps.

On Sept. 17, Standard & Poor's downgraded JPMorgan's counterparty credit rating to single A plus from AA minus and cut the long-term counterparty credit rating of its lead bank JPMorganChase Bank to AA minus from AA. Moody's Investors Service put the long-term unsecured credit rating of JPMorgan, which is currently Aa2, on review for possible downgrade last month, according to the ratings desk in New York.

29 Sep 2002