Risk Management

Morgan, Insurers Settle on Enron Surety Bonds

With jury verdict looming, insurers and bank agree on 60 percent payout for Enron surety bonds; who blinked?
Stephen TaubJanuary 3, 2003

JP Morgan Chase & Co. finally settled its dispute with a group of 11 insurance companies that had issued surety bonds for obligations guaranteeing finance deals the bank set up for Enron Corp.

Under the agreement, JP Morgan Chase will receive about 60 percent of the principal amount of $965 million.

Bloomberg reported the figure could be as high as $654 million. But Reuters noted that this sum will be reduced to about $568 million as the bank agreed to buy the insurers’ rights to reclaim surety bond payments from Enron.

As a result, JP Morgan Chase said it will take a $1.3 billion charge in the fourth quarter.

About $400 million roughly represents the amount the bank will not receive from the insurance companies. It will also establish a $900 million reserve for costs of litigation and regulatory inquiries involving Enron, including $80 million for the research settlement with state and federal authorities.

The insurance dispute, which had been on trial for a month, was to go to the jury on Thursday,

The 11 insurers agreed to shell out the following: Travelers, $139 million after accounting for the sale of its bankruptcy claims; Chubb’s Federal Insurance, $95.8 million; Lumbermens Mutual Casualty, $93.7 million; Allianz’s Fireman’s Fund, $92.3 million; St. Paul’s St. Paul Fire & Marine Insurance, $70 million; CNA Financial’s Continental Casualty and National Fire Insurance of Hartford, $46.7 million; Safeco, $33.2 million; Hartford Financial Services Group, $21 million; and Liberty, less than $12 million.

So who blinked, JP Morgan Chase or the insurers? “The surety bond settlement represents us being on the right side of that deal but recognizes the risk of going all the way in a jury trial,” JP Morgan chief executive William Harrison said during a conference call on Thursday.

“It’s obviously a positive, because everyone I spoke to said there was no way in heaven or hell JP Morgan would win this case,” Richard Bove, an analyst at Hoefer & Arnett, told Reuters.

CFO.com first reported on the dispute in July. At the time, attorneys for the defendants claimed the insurers didn’t have to pay off on the surety bonds because JP Morgan Chase and Enron misrepresented the covered gas deals as real commodities trades—and not as financial transactions.

So why did the banks agree to write the bonds in the first place? An internal memo from Kemper Insurance dated April 26, 2001 (and later obtained by JP Morgan Chase) seems to show that Kemper employee James Crinnion considered the outstanding surety bonds to be quite risky.

Farther down in the note, however, Crinnion concedes that Enron’s stature makes it a risk worth taking. “From all accounts Enron is a large enough account with a strong balance sheet, cash flow and available credit facilities to warrant Kemper to issue such onerous bonds,” wrote Crinnion. “Based on Enron’s financial strength I would recommend these long-tail financial guarantees as an acceptable risk on a going forward basis.”

But, he added, “I would not recommend we write these types of obligations in the future.”

Trend? Another Big Outsourcing Deal Signed

Speaking of JP Morgan Chase: the bank announced it has signed a seven-year outsourcing agreement with IBM. The deal is valued at more than $5 billion.

The companies said in a press release the pact “will enable JP Morgan Chase to transform its technology infrastructure through absolute costs savings, increased cost variability, access to the best research and innovation, and improved service levels.”

Under the agreement, JP Morgan will outsource a substantial portion of its data-processing technology infrastructure, including data centers, help desks, distributed computing, data networks, and voice networks. The agreement includes the transfer of about 4,000 JP Morgan employees and contractors as well as selected resources and systems to IBM in the first half of 2003.

Application delivery and development, desktop support, and other core competencies will largely be retained inside JP Morgan Chase

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