Once again, rumors about supposed gold losses have caused a minor selloff in shares of
J.P. Morgan Chase
Shares of the nation's second-largest bank plunged nearly 6% earlier on unsubstantiated rumors of big losses in gold trading and derivative contracts tied to the price of gold.
The rumor and the sharp drop in J.P. Morgan stock reprised a similar incident this summer, when rumors about the bank's big derivatives business and gold trading
rocked the shares.
And once again, officials at J.P. Morgan have come out to strongly deny the rumor. Bank spokesman Joe Evangelista called the speculation that the bank may have lost up to $17 billion on gold trades "false" and "irresponsible."
He also denied several other rumors circulating on trading desks Thursday. One of those had New York Attorney General Eliot Spitzer conducting an investigation into potential accounting irregularities at the bank, even though that's not generally in Spitzer's job description.
Spitzer's office could not be reached for comment.
Meanwhile, several bank analysts were quick to denounce the gold rumor, which some said originated from trading desks in London.
Reilly Tierney, a Fox-Pitt Kelton analyst, said the rumor was more "silliness," and he attributed it to traders who took short positions on J.P. Morgan's stock when it was trading around $16 a share. He said some short-sellers -- traders who make bets that a stock will fall in price -- may be concerned that J.P. Morgan's stock won't go that low again.
UBS Warburg analyst Diane Glossman, meanwhile, told
that the rumor about gold losses at J.P. Morgan is one that keeps getting recycled out of Europe.
J.P. Morgan shares began the day trading at $22.06. At midday, the stock was down 96 cents, or 4.4% to just over $21.
Thursday was a good day for the gold rumor to surface. Most bank and financial stocks were down in midday trading, as investors worry anew about weakness in the economy following the
surprise half-point interest rate cut on Wednesday. The Philadelphia KBW Bank Index was down 2%.
It's also possible that shares of J.P. Morgan were feeling pressure because a federal judge Wednesday rejected the bank's attempt to force a group of insurance firms to make an immediate payment on some $1 billion it's allegedly owed in
-related dealings. J.P. Morgan is suing the insurers, claming they agreed to guarantee some oil and gas contracts the bank had arranged with Enron through an off-shore entity called Mahonia.
The insurers contend they don't have to make the payments because the oil and gas contracts were really fraudulently disguised loans to Enron -- something that is not normally insurable.
Mahonia is a so-called special-purpose entity established by J.P. Morgan to manage these transactions. (Technically, it's owned and managed by Mourant du Feu & Jenue, a division of a European law firm.)
Those Enron deals were the subject of a highly publicized Senate committee hearing, during which lawmakers alleged that J.P. Morgan had helped Enron improperly inflate its revenues. J.P. Morgan denies the allegation.
But U.S. District Judge Jed Rakoff, in ordering a Dec. 2 trial on the claim, said enough of the facts in the case are in dispute that it's possible for jurors to side with the insurers. In a ruling from the bench, Rakoff said, "a reasonable juror could, if he or she wished, find by clear and convincing evidence of the fraud alleged."
Many industry analysts suspect that as it gets closer to a trial, J.P. Morgan will look to settle with the insurers. And if that were to occur, it could force the bank to take a hefty charge against earnings in the fourth-quarter.
As of now, J.P. Morgan has classified the disputed $1 billion insurance guarantees as a nonperforming asset, but has yet to write off any of it as uncollectible. Sources say that under standard accounting rules, the bank can't write off the guarantee as long as it believes it stands a good chance of prevailing in the lawsuit.
Another incentive for J.P. Morgan to settle the case is that an adverse ruling could prompt the
Securities and Exchange Commission
to take an even closer look at the Mahonia transactions with Enron. In September, Mourant du Feu & Jeune confirmed that the SEC made a request for information about its dealings with Mahonia.
The SEC and the Department of Justice are looking into deals a number of Wall Street firms had with Enron, in order to determine whether the banks and securities firms aided and abetted Enron in its apparent strategy of inflating revenues. For their parts, banks like J.P. Morgan contend they were unwitting victims of Enron's alleged deception.