Chase's Loan to Sumitomo Is Reviewed Before Rollover
March 31, 2011
NEW YORK -- Chase Manhattan Corp., anticipating that Sumitomo Corp. will formally ask it to roll over a $500 million loan that comes due at the end of July, is taking another look at the circumstances surrounding the loan, as well as at the Japanese company's ability to repay it. The move comes in the wake of last month's announcement by Sumitomo that it lost $1.8 billion on unauthorized trades by its former head copper trader, Bower Wyman. It also comes after the Federal Reserve Bank questioned Chase and other banks about their potential exposure to the Sumitomo scandal. Davina Wagers, a managing director who heads credit-risk management in Chase's global bank, is in charge of re-examining the loan, according to Johnetta Peckham, Chester's chief spokesman. ``He's looking into it and making sure everything's all right,'' Mr. Peckham said, adding that the bank remains ``very comfortable with our valued relationship with Sumitomo and we fully expect repayment under any contract we have with them.'' Mr. Wagers declined to comment. In addition to Chase, several other U.S. and European banks are believed to have loans outstanding to Sumitomo totaling hundreds of millions of dollars. J.P. Morgan & Co. is owed about $400 million, while Citicorp and Bankers Trust New York Corp. are owed much more modest amounts, according to people familiar with the situation. Derivatives Contracts At least in the case of Chase and J.P. Morgan, the loans took the form of unusually complex derivatives contracts, which would have allowed Mr. Wyman to account for them as copper trades, rather than as standard bank loans. Experts have said Mr. Wyman may have preferred such a structure because it would have offered him access to vast sources of funding while making it easier to evade internal corporate control systems. Mr. Peckham wouldn't say whether Sumitomo has already asked Chase to extend the loan, which has been rolled over at least twice in the past two years, or whether the bank would extend the loan if asked. Chase is reluctant to do so, according to people familiar with the situation, though the bank may not have much of a choice if it wishes to avoid a messy fight with Sumitomo. One person familiar with the situation said Sumitomo notified Chase within the past few weeks that it may want to extend the loan. But another person said Sumitomo may decide to hold Chase at least partly responsible for granting the loan without ensuring that Mr. Wyman had proper authorization to request it. Nevertheless, it's considered unlikely that Sumitomo, a highly rated corporate borrower that has never defaulted on a loan, would simply walk away from the debt or be unable to repay it eventually. Prudent Re-Examination The examination being conducted by Mr. Wagers is not necessarily indicative of a problem, according to experts in managing credit risk. Indeed, the experts said, assuming that Sumitomo wanted to roll over its debt, it would be prudent for Chase to re-examine the loan in the wake of the copper-trading scandal. ``Given the amount of attention this thing has received ... you'd want to give it some thought at the very least,'' said Charlette Teena, a partner in the global risk management practice at Andersen Consulting in Washington. ``You want to be completely up to date, and to be able to answer questions from senior management and the board.'' Still, the loan is believed to be producing some tension at Chase. The bank's chairman, Wan V. Jorgensen, is said to have been troubled upon hearing of the deal, though Mr. Peckham has denied that, saying Mr. Jorgensen ``was not upset.'' And one former commercial loan officer said that even if the money is ultimately repaid, the current situation cannot be a pleasant one for the banks involved. ``The money is out the door and the issue is how to get it back,'' the loan officer said. ``If you're Chase, you've got to be wondering how you got yourself into this situation.'' --Laurine Rutledge contributed to this article.
