Updated from 1:04 p.m. EDT

It might be time for heads to roll at

J.P. Morgan Chase

(JPM) - Get Report

.

A day after the bank warned that third-quarter earnings will be much worse than expected because of rising loan losses and weak trading revenue, there's a growing call on Wall Street for a top-level management shakeup.

Indeed, some say that's be the only way the nation's second-largest bank is going to win back the wallets of investors.

League Leaders

"The company is messed up," says Sean Egan, president of Egan-Jones Ratings, a small corporate credit-rating agency. "They've had a lion's share of these (loan) blow-ups. They'd be insane not to change some people who have been involved in making credit decisions."

The latest straw was an admission Tuesday by the bank's top management that it underestimated weakness in the telecom industry -- a sector J.P. Morgan has loaned more money to than any other big bank.

Bank officials blamed their misjudgment of the sector's fortunes for a huge $1 billion increase in nonperforming loans during the quarter, which isn't even officially over until Sept. 30.

Nonperforming loans are generally defined as loans that are more than 90 days past due. Once a bank classifies a loan as nonperforming, the next step is for the institution to write it down as an uncollectable debt and take a charge against earnings.

Inertia

Analysts and investors say it's not surprising that J.P. Morgan would experience higher loan losses than other banks because of its sheer size. But they seem increasingly unwilling to excuse the bank's willingness to stand pat on making any changes in its risk-management department.

"I do think the market would like to see them be more proactive in terms of addressing risk management," says Timothy Ghriskey, president of Ghriskey Capital, a hedge fund that currently has no position in J.P. Morgan shares. "They can take an action which would help the stock price."

Reilly Tierney, a bank analyst with Fox-Pitt, Kelton who owns J.P. Morgan shares, says the bank's management hasn't shown that it has any turnaround strategy, other than waiting for an economic recovery to take hold.

Others say the bank, at a minimum, could move to cut its lofty dividend, which has an annual payout of 6%. They say that would be a signal to investors that the bank is willing to make tough decisions by reducing its quarterly payout to shareholders and instead put that money to other corporate uses.

Holding the Line

But for now at least, J.P. Morgan shows no sign it's ready to pursue either of those options. A bank spokesman declined to comment on the subject of a possible management shake-up and notes the bank has no plan to reduce the dividend.

However, lacking signs the bank will take steps to get its house in order, traders and investors raced to dump shares of J.P. Morgan, along with those of other bank stock.

In late afternoon trading, the stock fell $1.25, or 5.8% to $20.30. That means the stock is now trading below its book value, which is estimated at $20.93 a share. But the stock rebounded sharply from the morning, when it plunged 12%.

J.P. Morgan's stock price wasn't the only thing melting Wednesday. In light of the warnings, a number of analysts were quick to slash their earnings estimates for the third quarter.

Prior to the bank's warning, the Thomson Financial/First Call consensus estimate was for the bank to earn 54 cents in the quarter on an operating basis -- four cents less than the second-quarter.

But Fox-Pitt's Tierney now estimates that J.P. Morgan will earn just 15 cents a share in the quarter. Michael Mayo, a Prudential Securities bank analyst, reduced his estimate to 12 cents from 58 cents.

In a research note to clients issued after the warning, Mayo said: "There is no reason to give the firm the benefit of the doubt for credit quality."

Casualty List

One thing that makes it difficult for investors and analysts to come to grips with J.P. Morgan's loan woes, is that the bank -- as is typical in the industry -- won't say which telecommunications loans it's now classifying as nonperforming.

Analysts say the telecom loans currently causing headaches for J.P. Morgan's management probably aren't ones made to bankrupt companies like

WorldCom

or

Global Crossing

. Rather, they are loans made to telecommunications firms either on the verge of bankruptcy or firms that are struggling to stay afloat.

And a review of some large telecom loan deals arranged by J.P. Morgan the past few years reveals plenty of potential candidates. Thomson Financial Securities Data reports that some of the ailing telecoms J.P. Morgan has arranged large loans for include

Lucent Technologies

(LU)

,

Charter Communications

(CHTR) - Get Report

,

Nortel Networks

(NT)

and

Qwest

(Q)

.

What scares some money managers is that given the latest earnings warnings, they have little confidence that the bank won't have more negative surprises about other problem loans in the next few quarters.

That's why Michael Stead, portfolio manager Well Capital Management's SIFE financial-services fund, says he's glad he sold all his shares of J.P. Morgan earlier this month, when the stock was trading around $24 a share. He says other than buying the stock for a short-term trade, he won't make a long-term investment in J.P. Morgan until there's a management shake-up at the bank.

"I'd like a management change," says Stead, who manages more than $500 million. "For me the confidence is just not there to look at it as a long-term holding."