A switch from letters of credit (L/Cs) to surety bonds to guarantee Enron Corp.'s energy trades may prove pivotal in J P Morgan Chase and Co's billion-dollar court action against 11 insurers.

The deal is at the heart of a suit by the second-largest US bank against the insurers. They have refused to pay J P Morgan US Dollar 1 billion in surety bonds that guaranteed the trades against default by now-bankrupt Enron.

Disguised loans

The insurers argue that the bank deceived them into writing an insurance policy for the transaction, which was the subject of a heated US congressional hearing this summer.

A New York court is now hearing that the insurers have refused to honour the policy because a series of so-called prepay oil and gas transactions involving J P Morgan, Enron and offshore company called Mahonia were really "disguised" bank loans to Enron and not actual contracts to transfer energy shipments.

Risk transfer

J P Morgan executive, Richard Walker, told the court that it regarded the financial mechanics of its secret energy trades with Enron and its affiliates as "innovative" and "proprietary." Walker served as the bank's primary account manager for Enron, which filed the second-largest US bankruptcy a year ago.

Bank officials have testified that the insurers knew the true nature of the transactions and issued the surety bonds. J P Morgan benefited by switching from L/Cs to surety bonds to guarantee Enron's energy trades, said bank managing director Robert C Mertensotto in a July 30 deposition broadcast to the court. By switching, the 11 insurers took the risk the bank had previously had for any Enron trade default he said.

Write off

If J P Morgan were to lose the lawsuit, it would be forced to write off the US Dollar 1 billion insurance policy as a lost investment and probably take a big charge against earnings.

The bank currently classifies the US Dollar 1 billion in contracts as non-performing assets and will not write off the money unless it loses the suit. J P Morgan has posted net income of more than US Dollar 1 billion in just two of the past eight quarters.

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