Traders Ignore J.P. Morgan's Enron Setback

Sometimes in the market, a setback isn't really a setback. At least not yet.

Take the case of J.P. Morgan Chase (JPM), which came that much closer Tuesday to not getting the $965 million it says insurance companies owe it for failed Enron oil and gas contracts. Probably the most remarkable thing about the decision Tuesday was investors' reaction: There was hardly any at all.

Of course, some people would argue that J.P. Morgan has already been penalized enough when it comes to Enron and the other big corporate fiascoes of recent months. The bank has seen its shares fall 11% this year as investors worried about its $2.6 billion-worth of Enron debt, as well as its big exposure to the struggling Tyco(TYC) and the now-bankrupt Kmart and Global Crossing. There's a new rumor about the big New York bank practically every day, it seems.

But Tuesday's events had nothing to do with rumors and everything to do with the long unwinding of the Enron mess. And even if bankruptcy law and creditor committees don't exactly stir your soul, investors could be kicking themselves down the road for their decision to ignore this case -- apparently assuming that a strong economic rebound will erase a lot of mistakes.

Round and Round

At issue Tuesday were six surety bonds issued by several insurers, including Citigroup's (C) Travelers Property Casualty, Chubb(CB) and St. Paul Cos. (SPC).

The insurers had issued the bonds on oil and gas contracts between Enron and Mahonia, an offshore J.P. Morgan energy-trading affiliate. When Enron failed, it defaulted on those contracts. The insurers argued that these trading contracts were in fact thinly disguised loans, and refused to pay. J.P. Morgan had hoped to get summary judgment against the insurers, forcing them to cough up the cash now.

The U.S. District Court saw otherwise, and though few people had expected it would grant summary judgment, the terms with which the court denied the motion give the impression that J.P. Morgan faces an uphill climb on this one. Moreover, the company faces a long climb, during which investors can only wonder whether Morgan will get back its money: The presiding judge scheduled a trial for Dec. 2.

In its ruling, the court cited evidence that Enron sold natural gas to Mahonia on the same day that it bought it from another company, Stoneville Aegean. Both Mahonia and Stoneville were set up by the same company -- Mourant & Co. -- and have the same director and the same shareholders. In the incident cited, Enron sold $330 million in natural gas to Mahonia (and got paid right away). Enron entered into an agreement with Stoneville "to pay Stoneville $394 million to buy back the same quantities of gas on the same delivery schedule -- but with the $394 million to be paid at specified future dates," according to the evidence the insurers brought before the court.

"These arrangements now appear to be nothing but a disguised loan -- or at least have sufficient indicia thereof that the Court could not possibly grant summary judgment to plaintiff," wrote Judge Jed Rakoff.

J.P. Morgan would like everyone to know it feels it's been rooked. "The good faith of the insurance companies will be on trial," said the company in a statement. "Every client or counterparty will now need to question the insurance companies' ability or willingness to honor plain-vanilla contracts."

Recovery Talk

Despite all the commotion, J.P. Morgan's stock held up surprisingly well, moving in line with its peers and closing the day up a penny to $32.51. After trading higher for most of the day, the Philadelphia Stock Exchange KBW Bank Index closed off 0.4%.

But investors may soon come to pay closer attention to this case, according to Prudential Securities analyst Mike Mayo, who rates the bank a sell and whose firm hasn't underwritten for Morgan. For now, investors are focusing on how quickly the economy appears to be improving. With the recovery talk, all the worries about more loans going wrong have faded away.

But in a less euphoric environment, little things like $965 million potentially getting struck off J.P. Morgan's books will begin to matter again. "Just because they don't care today doesn't mean they won't care in a few weeks," says Mayo.

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