JP Morgan accuses WestLB on $165m Enron swap

JP Morgan Chase has accused WestLB of failing to make payment on a $165 million letter of credit (l/c) backing an Enron-related swap. JP Morgan Chase made the dispute public, though it did not name West LB, instead merely referring to “a European financial institution”, yesterday. A person familiar with the situation said the l/c provider was WestLB.

The dispute came to light when JP Morgan filed a lawsuit against 10 insurance companies, seeking payment on surety bonds the insurers issued to back about $1 billion of Enron’s prepaid forward natural gas and crude oil contracts.

JP Morgan officials declined to comment beyond what is contained in the lawsuit. But people familiar with the situation said that Enron came to the bank with the insurance already lined up. JP Morgan would not have entered into the deals with the now-bankrupt energy trader except had it not been for the surety bonds, these sources added.

Marc Shapiro, head of risk management at the bank, held a conference call Thursday. “Obviously this was a surprise to us because we expected [the surety bonds and l/c] to be promptly paid,” Shapiro said. “It is our expectation that we will ultimately be paid on these,” he added.

The fallout from the insurers’ alleged non-payment could further damage multiline insurers’ attempts to expand their financial market business. Many believe the Hollywood Funding case earlier this year, in which a subsidiary of AIG refused to pay on a contract backing some film finance bonds, set a bad precedent. Speaking at Risk magazine’s Alternative Risk Strategies conference in September, Tobey Russ, president of Chubb Financial Solutions, said, “The film finance deals have been a stumbling block for the whole industry.”

Indeed, during Thursday’s conference call, JP Morgan’s Shapiro said the firm was reviewing its use of surety bonds as collateral and that it would be unlikely to use them in the future.

JP Morgan’s share of the disputed insurance payment is $965 million. The insurance contracts were payable today; the letter of credit was payable at an earlier date. WestLB officials were not immediately available for comment.

The lawsuit names the following insurance companies: Hartford Fire Insurance, Liberty Mutual Insurance, Safeco Insurance Company of America, St Paul Fire and Marine, Continental Casualty, Fireman’s Fund Insurance (an Allianz subsidiary), Federal Insurance (a Chubb subsidiary), Lumberman’s Mutual (a Kemper subsidiary), Travelers Indemnity and Travelers Casualty and Surety.