Commentary: J.P. Morgan: Pierpont Would Not Approve

By Heather Timmons

What would J. Pierpont Morgan do? J.P. Morgan Chase & Co. (JPM ), the behemoth that now bears the legendary financier's name, is a mess. After Morgan shocked Wall Street on Sept. 17 by announcing a $1 billion increase in bad loans and a $1 billion decline in trading revenues, its stock hit decade lows. It was so cheap Street tattle had it that British-based global bank HSBC Holdings PLC (HBC ) and Chicago's Bank One Corp. (ONE ) might be interested in buying it. Neither bank, nor Morgan, would comment.

Pierpont the iron-willed capitalist often found himself in such tight corners. "It was a wildly speculative marketplace in those days," says biographer Jean Strouse, author of Morgan: American Financier. "Railroads weren't a sure thing. Some turned out to be Microsoft (MSFT ) and some turned out to be Enron." But, good or bad, Pierpont took what Strouse calls "moral responsibility" for the deals.

He certainly wouldn't have played for sympathy over the tidal wave of bad corporate debt and defaults that has washed over Morgan and other banks. The present head of the House of Morgan, CEO William Harrison, wrote in The Wall Street Journal on Sept. 18 that banks "have been among the parties most damaged" by fraudulent accounting, and shouldn't be made scapegoats. Investors in $11 billion of WorldCom Inc. bonds issued by Morgan and Citigroup (C ), now worth cents on the dollar, don't agree: They're suing the banks for allegedly failing to do proper due diligence before underwriting the bonds. Morgan and Citi contend they've done nothing wrong.

Although Pierpont was prone to debilitating fits of depression when his business wasn't going well, he was steadfast in his determination to fix his own problems. He often applied a process that was called Morganization. He would take over problem companies, flush out incompetent managers, and appoint people he trusted. Over time, many of the companies would recover and become profitable, keeping capital flowing into other Morgan deals.

A touch of that is needed now. The bank's current problems stem from an ill-timed merger. Chase Bank bought J.P. Morgan in 2000, just before the stock markets tanked and investment banking deals dried up. Today, its $22.50 stock price is a steal compared with a conservative $30 sum-of-the-parts valuation of its main businesses, according to E. Reilly Tierney, banking analyst at boutique investment bank Fox-Pitt, Kelton. The asset management group alone has $492 billion in assets under management and could fetch at least $1.5 billion.

To avoid being bought and forcibly broken up, Pierpont's successors need to face up to their problems and knock the bank into shape. That may mean hiving off less profitable units, streamlining their operations to cut costs, and focusing their business model. A cut of over 2,000 investment banking jobs in October was a start. But as Pierpont said, "You cannot pick cherries with your back to the tree."

Timmons covers banking.

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