The stocks of both banking institutions, which are among the largest in the United States and the world, have plummeted over the course of the year. Citigroup’s stock has fallen by as much as 38 percent and J.P. Morgan’s has lost about 34 percent. By comparison, the benchmark Standard & Poor’s index of 500 stocks dropped about 25 percent so far this year.

The plunge in stock market prices--with the Dow Jones off by 30 percent and the Nasdaq by 75 percent since their peak in early 2000--together with the rising number of corporate bankruptcies, and decline in the U.S. economy have put the large banks "at risk." The collapse of one or two of the biggest U.S. banks would register a significant milestone in the downward slide of the world capitalist economy.

In a July 28 New York Times article aptly titled "Banks Are Havens (And Other Myths)," Gretchen Morgenson writes: "Since the bear market began in March 2000, investors have been told that even if the economy suffered, the risks of investing in bank stocks were far lower than they had been in the recession of 1990.... But a risk that the banks cannot expunge is the fear taking hold among investors that the nation’s largest financial institutions were central to the financing of the stock market bubble that has burst so spectacularly."

Several major U.S. banks have been in the middle of the explosive expansion over the past several decades of speculative investments in highly leveraged securities, such as derivatives and hedge funds, reaching into the trillions of dollars. Such an investment scheme worked well while the capitalist economy was expanding along with the bubble in equity markets. However, as the economy has slowed, the massive debt structure that had been built up threatens to implode. The largest corporations and financial institutions find themselves unable to meet their obligations, posing the real danger that the entire banking and monetary system could collapse.

According to a study released by Moody’s Investors Service, a total of 89 corporate bond issuers defaulted in the first half of 2002 with bonds totaling $64 billion. Twenty-one issuers defaulted on issues greater than $1 billion each. Since the start of 2000, Moody’s has downgraded the bonds of 126 companies to junk status.

Pointing to the high pace of defaults and the size and number of failures in the telecommunications sector globally, David Hamilton, the author of the study, observed that this "made the second quarter of 2002 one of the most severe periods of credit stress since the Depression of the 1930s."

AM Best, Moody’s, and Standard & Poor’s have are also issuing warnings on the state of life insurance companies. AM Best says it has been "stress-testing" major insurers, after recently downgrading Allamerica Financial and American Equity Investment Life Insurance. Investment losses for major U.S. life insurance companies total $23 billion so far this year, according to Moody’s, which warned of downgrades in the near term for AIG, MetLife, Aegon USA, and Prudential Financial. Standard & Poor’s revised its investment outlook on the life insurance industry from stable to negative.  
 
Commercial banks expand investments
In November 1999, then-president William Clinton signed the Financial Modernization Act, which repealed restrictions on banks under the Glass-Steagall Act. Glass Steagall had been put in place during the Great Depression in the 1930s and prohibited banks from affiliating with securities firms and insurance companies.

The Financial Modernization Act allowed commercial banks to compete with investment banks for the right to sell securities to investors. And the largest banks pursued most aggressively some of these high stake gambling operations with the funds depositors had placed in their savings and checking accounts.

J.P. Morgan Chase, for example, provided large loans to the now bankrupt Enron, Kmart, and Global Crossing. The bank has massive loans in Argentina and Brazil. In fact, according to the Loan Pricing Corporation, J.P. Morgan Chase is now the biggest lender to corporations, with mounting losses as bankruptcy filings by big companies rise.

Citigroup had also been involved in providing funds to Enron, and backed a $12 billion bond offering by Worldcom in 2001. In an attempt to refurbish its image, Citigroup announced August 7 that it would now start turning down deals that disguise debts from investors, and also account for employee stock options as an expense. J.P. Morgan Chase said that they would take steps "along the same lines."

The August 8 announcement by the U.S.-dominated International Monetary Fund that it would provide Brazil with a $30 billion loan led to a one-day gain in Citicorp and J.P. Morgan stock of 7.6 percent and 9.7 percent respectively. And for good reason. U.S. banks have about $25.6 billion in outstanding loans to Brazil, with Citigroup and FleetBoston accounting for close to $20 billion of this. The IMF funds will be used to insure payments to the U.S. banks arrive on time and in full. Brazil’s total external debt stands at $264 billion.  
 
Commercial banks consolidated
The scope of such massive loans has expanded with the consolidation of the commercial banks. In the 1990s the number of commercial banks fell by 30 percent, while the 10 largest increased their share of loans and other industry assets from 26 percent to 45 percent. One of the biggest of these mergers was that of J.P. Morgan and Chase Manhattan in September 2000, linking millions of people’s checking and savings accounts in Chase to the fortunes of J.P. Morgan.

J.P. Morgan Chase, with assets approaching $700 billion, is one of the biggest players internationally in high risk, highly leveraged investments in the derivatives market. Derivatives are essentially bets placed on the future rise or decline in the price of stocks, bonds, currencies, or other pieces of paper. They are legally binding agreements in which the party agrees to buy or sell a particular security at a future date at a specified price. The buying and selling of all kinds of derivatives has gone through a dramatic expansion during the 1990s. The total worldwide market value of derivatives exploded from $20 trillion in 1995 to in excess of $100 trillion today.

J.P. Morgan Chase accounts for more than 50 percent of the derivatives market within the United States. According to the Office of the Comptroller of the Currency (OCC), as of Dec. 31, 2001, it had notional amounts of derivative contracts outstanding of $23.5 trillion out of total derivatives of reporting banks of $45.4 trillion. By comparison, the U.S. gross domestic product totals about $10 trillion and total outstanding debt of all sectors comes to about $19 trillion, with credit card debt as well as car and personal loans now up to $1.7 trillion

J.P. Morgan Chase’s derivatives business, accounted for 15 percent to 20 percent of its earnings last year, according to Ruchi Madan, a stock analyst at Salomon Smith Barney. JPMorgan Partners, a venture capital subsidiary, has posted losses in five of the six quarters from mid-2000 through 2001. In fact J.P. Morgan Chase tried to minimize its losses in the last quarter of 2001 by betting on a decline in the Nasdaq 100, but the index rallied at the end of the year.

With billions of dollars owed by companies that have filed for bankruptcy, and a growing number of other companies near the brink, banks have been cutting back on corporate lending. They are "shunning companies in problem industries like energy, textiles, steel, and telecommunications, and charging higher interest rates and bigger upfront fees on most other loans, even to top-rated companies in healthy industries," stated a July 21 New York Times article.

As of June, banks had $1 trillion in outstanding commercial and industrial loans, according to Federal Reserve data. Banks are writing off more loans as well. At the end of 2001, write-offs of bad corporate loans for the 100 largest banks hit a peak of 2.41 percent of outstanding loans, or around $5 billion, nearly four times the percentage just two years earlier. J.P. Morgan alone took $807 million in write-offs in the fourth quarter of 2001, related to loan and trading losses tied to Enron and Argentina.

The capitalist crisis is deeply affecting banks throughout the imperialist centers of Europe as well. Shares in European banks fell nearly 25 percent from the middle of May through the end of July. "There will be a significant increase in corporate collapses across Europe," stated Tony Thompson, head of European corporate recovery at KPMG. "I’d expect the impact on the banks to be very grave." The outlook is "bleakest in Germany," reported a July 31 Financial Times article. According to Creditreform, a German credit data bureau, insolvencies in Germany will end the year up about 23.5 percent at a record 40,000.
 
 
Related articles:
Deflating balloons of debt and other paper values  
 
 
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