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December 14, 2000

Chase, J.P. Morgan See 4th-Qtr Profit Below Forecasts
By Dom Yanchunas, Bloomberg

Credit Bubble Explodes ... Weiss comments

NEW YORK - Chase Manhattan Corp. and J.P. Morgan & Co. said fourth-quarter earnings will miss analysts' estimates because of lower trading revenue and higher merger-related costs.

Chase, the No. 2 U.S. bank, agreed to buy J.P. Morgan in September. They now expect to cut 5,000 jobs, or about 5% of their combined workforce, J.P. Morgan spokesman Joe Evangelisti said. That's down from an estimated 10,000 jobs.

The shortfall, coming a day after Charles Schwab Corp. said it would have trouble meeting its fourth-quarter estimates, may foreshadow an industry-wide slowdown. Bank of America Corp., the largest U.S. bank, earlier this month warned it was taking higher than expected loan loss provisions that would damp fourth-quarter profit.

"Capital markets have been very quiet in the fourth quarter, and we've already had a warning from Bank of America," said James Alexander, a banking analyst at Commerzbank Securities in London. "It's no surprise that JP Morgan and Chase have had to issue a warning."

It certainly is no surprise that Chase and JP Morgan have had to issue earnings warnings. Industry-wide, banks have been blaming difficult "capital markets" and a "challenging market environment" for their predicaments. What they are really complaining about is the credit crunch and corporate bond disaster that they've brought on themselves.

There's an old saying on the Street that "the worst loans are made in the best of times." Well, since the bull market began, banks have been handing out money like Halloween candy to every company that showed up on their doorstep. Now it turns out that many borrowers were just bottomless pits dressed up to look like corporations. The companies borrowed recklessly, without taking into consideration an eventual economic downturn and its consequences.

But when a credit bubble bursts, it doesn't deflate gradually. Now the banks are stuck with the loans, trying to squeeze payments out of near-bankrupt dot-coms and tech wrecks. The number of companies that will go into default will more than triple over the next 12 months, according to a report from Moody's Investors Service.

The banks haven't learned their lesson. Soon they'll be asking Greenspan to cut rates hoping that they can inflate the credit bubble once again. Ha! Actually, it just unleashes the potential for them to get into deeper trouble.

Here's why: Even with a cut in the Fed funds rate, would any cautious lender jump at the chance to lend money to Amazon.bomb, Xerox or other red-ink bleeding corporations? Amazon lost $57.8 million on just its investment in online pet store, And Moody's shows increasing default probabilities for Corel, Xerox, Apple, and more big-name companies.

So banks will have a choice to make: Not lend money, even at lower rates, and watch their profits wither away, or lend money to companies that are becoming riskier by the day. In short, the bursting of the credit bubble means the end of easy credit -- and no easy answers for banks and their big borrowers.

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