Word: morgan
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...American bank that could have the most at stake is J.P. Morgan. Government examiners, who have access to internal bank records denied other mortals, put Morgan's total credit risk from derivatives at $116 billion at the end of last year, the largest of any U.S. bank. Should Morgan suffer a loss of just one-tenth of that from defaulting customers, the bank's equity could be wiped...
That dam may have started to crack. While the U.S. banking industry pocketed record earnings last year, Morgan's fell 7%, to $1.46 billion. Derivatives are partly to blame. Morgan last year declared it had $659 million in nonperforming assets, 90% of which were defaults from Asian derivative counterparties. Among the defaulters were three South Korean companies, led by SK Securities, which early this year refused to pay $490 million that Morgan claims it is owed...
...this case, SK Securities entered into a currency-swap deal with Morgan in early 1997 whereby SK Securities in effect borrowed U.S. dollars and invested them in Thai baht. But within a year the baht plunged in value, from 25 to 48 to the dollar, and the Korean firms couldn't cough up the dollars to repay Morgan. They subsequently sued Morgan in New York and in South Korea, claiming they weren't properly advised of the risks associated with derivatives...
...other words, they pleaded stupidity. "That's hard to believe," says Mark Brickell, managing director of J.P. Morgan's derivatives group. "When you don't have an alternative, you do the last thing you can do. They didn't have the money at hand, and they chose this route as a way to try to get out of the contracts." Morgan's predicament has nevertheless tarnished its famous bank division's golden debt rating and fueled speculation that the company is a candidate for sale...
...Morgan maintains, like all banks, that it has properly managed its risks abroad. "The impact of derivatives over the past 15 years on the banking industry is that today we can manage risks better then ever before," says Brickell. "We may hit a pothole from time to time and even get a flat tire. But we've traveled a long, long...