Feds eye Chase's Enron role
Report says Fed examining accounting of commodity trades of offshore bank unit.
February 22, 2002: 6:57 a.m. ET
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NEW YORK (CNN/Money) - Enron Corp.'s accounting woes could continue to hit investors Friday after a published report that the Federal Reserve of New York is examining J.P. Morgan Chase & Co.'s accounting of commodity-related trades involving the now bankrupt energy trader.
The Wall Street Journal, citing Fed documents it said it reviewed under the Freedom of Information Act, said the investigation centers on an off-shore entity set up by the old Chase Manhattan Bank a decade ago.
Many leading companies have seen their stock hurt in recent weeks when questions have been raised about the transparency of their accounting practices. Shares of J.P. Morgan Chase (JPM: Research, Estimates), a component of the Dow Jones industrial average, lost 27 cents to $29.14 in trading Thursday.
The paper said that entity, Mahonia Ltd., paid Enron upfront for future delivery of natural gas or crude oil, what is known as a "prepaid forward transaction." Enron accounted for these transactions as trades, rather than loans. The paper said that the Fed is reviewing how J.P. Morgan Chase accounted for the transactions.
Joseph Evangelisti, a spokesman for the nation's No. 2 bank holding company, said the investigation is not unusual and that it is fully cooperating.
"It is perfectly normal for the Fed, in the course of its ongoing and continuing review of the banks it supervises, to seek information on high-visibility issues or transactions," Evangelisti is quoted as saying.
A Fed spokesman said the central bank could not comment on specific investigations, but said, "As a general matter, banks are permitted to engage in prepaid forward transactions."
The paper said that the bank is already in litigation over the refusal of several insurance companies to honor nearly $1 billion in guarantees made to J.P. Morgan against Enron's default on the Mahonia transactions. It said those insurers argue those trades were disguised as loans.
Some analysts are concerned that J.P. Morgan Chase's exposure to Enron problems could force it to cut its dividend, and the stock has lost more than 25 percent of its value since Jan. 10.
"They could be faced with a choice between maintaining their credit rating or maintaining their dividend," said Prudential Securities banking analyst Michael Mayo in a comment to the paper. 
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