J.P. Morgan Chase & Co. announced $1.3 billion of fourth-quarter charges Thursday but declared victory in its dispute with 11 insurance companies over the payment of $1 billion in surety bonds.
Just days ago the banking company seemed to be struggling in its battle in federal court in Manhattan. But early Thursday it announced that it would recover 60% of the value of bonds the insurers had underwritten to cover transactions between it and Enron Corp. but refused to pay after the energy trader collapsed.
Morgan Chase said it would take a $400 million charge for the portion that is not covered in the settlement and would put $900 million into reserves to cover future civil litigation related to Enron and other matters.
In a conference call later Thursday, executives said that the charges would shave 43 cents off fourth-quarter earnings - which would result in a loss for the quarter - but that on an operating basis the company was set to meet expectations. Revenues from trading have rebounded from a dismal third quarter, the executives said, and credit quality is stabilizing. Morgan Chase's dividend, under fire from some analysts as too rich given the downward spiral of its stock last year, will stay intact.
This was a "big saving-face event for J.P. Morgan management," said E. Reilly Tierney, an analyst at Fox-Pitt Kelton Inc. The outcome "is very positive" for the firm.
Morgan Chase's management also portrayed the news as a positive. "As we've said all along, we believe our firm acted appropriately, in all the transactions involved in the insurance companies," said chief executive officer William B. Harrison Jr. during the conference call. "Nevertheless, given the environment that we are in and given the uncertainty of jury verdicts in complex matters like this, we believed it was prudent to accept a reasonable settlement, which we think we have done."
Chief financial officer Dina Dublon said Morgan Chase had "a very strong belief" that it was in the right. "The settlement at the level at which we settled represents, from our perspective, a recognition that we were in the right."
She said the $900 million reserve represents a "prudent estimate" of costs related to litigation and other regulatory matters that have arisen over the past year, including the company's $80 million equity research settlement with New York State Attorney General Eliot Spitzer last month.
Executives said the figure should cover cases that should resolve themselves over the next four years.
Word of the settlement came on the morning the jurors were scheduled to begin deliberations in the case after a month-long trial. Attorneys for the insurance companies approached Morgan Chase with a settlement proposal late Monday, a Morgan Chase spokesman said. Negotiations continued through the evening on Wednesday.
The press release issued Thursday morning said 10 of the 11 insurers had agreed to the settlement. Liberty Mutual Group, the lone holdout, later joined the other insurers, which included Chubb Corp., CNA Financial Corp., and Travelers Property Casualty Corp.
Travelers, a unit of Citigroup Inc., issued a statement saying its portion of the settlement totaled $139 million.
Morgan Chase stock, in which trading was halted for part of the morning, jumped on the news of the settlement. It closed up 7.5%.
Analysts expect the company to post a loss for the fourth-quarter because of the charges, capping a gut-wrenching year of losses and writedowns. Earnings are scheduled to be released Jan. 22.
Ms. Dublon said expenses will be higher than analysts are anticipating because of severance costs and incentive expenses, which are higher than the low levels of the third quarter. But revenue will prove to have been stronger than expected because of a rebound in trading and a pickup in capital markets across the board, she said.
Andrew Collins, an analyst at U.S. Bancorp Piper Jaffray, said he was pleased to hear that revenues were better than expected. This is an indication that the company's business model has not completely evaporated despite the effects of Enron and WorldCom, he said.
The charges will reduce the firm's capital ratio by 20 basis points, bringing it to 8.4%, Ms. Dublon said, but she added that Morgan Chase does not expect a negative response from rating agencies.
Moody's Investors Service on Thursday affirmed its rating, saying it already reflected the risks related to this case and future ones.
Richard Strauss, an analyst at Goldman Sachs, called Morgan Chase's announcement "a positive, in that the company ended up doing far better than the worst-case scenario." But "we remain cautious on the stock based on the environment," he wrote in a research note.
