Chase Manhattan Corp. had been very uppity at the end of last year. Its earnings were soaring as a result of surging prices of "New Economy" stocks in Chase's portfolio. CEO William B. Harrison Jr. declared that "I got converted--I became a believer," in the staying power of the New Economy.

Understandably. The company reported $1.3 billion in gains in the fourth quarter from its New Economy investments, largely in technology stocks. It was a heady period, making Chase feel like an invincible steamroller. That mentality further convinced management that it had to get deeper into the investment banking business, and increased its appetite to buy a big investment bank.

No bulge-bracket firm was interested in a wedding, so Chase ended up signing a nuptial agreement this fall with J.P. Morgan & Co., which occupies a strong but second-tier position in the industry.

Investors have not been particularly pleased about the pact, and dumped Chase stock. It was down more than 30% from its pre-announcement level just before the bank announced its third-quarter earnings in mid-October.

Those earnings were a massive disappointment, and it was Chase's beloved technology stocks that helped do it in. Per-share earnings dropped 26% from the third quarter of 1999, to 68 cents, from 92 cents. And nine-month per-share earnings dropped more than 5%, to $2.68, from $2.83.

A large part of the decline was attributable to a $25 million loss in Chase's private equity portfolio, compared with a $377 million gain in the 1999 quarter. The bank said, though, that the carrying value of the investments in its publicly traded portfolio was about 2.6 times their original cost. In addition, relatively poor performance in its investment banking business also hurt the company's earnings. Cash operating earnings fell 9%, to $384 million, from $420 million.

Of course, it is possible that Chase's equity portfolio will snap back, but it's also possible that it will fall considerably further. It's odd that a bank would stake so much of its well-being on such a volatile market. The market not only punished Chase, its stock was down 2.8% on the day it announced its earnings, but it pulled Morgan down as well, although J.P. reported a 25% increase in per-share earnings that very day.

Considering Chase's steep decline from the level it had traded at before the Sept. 13 merger announcement, it is possible that the wedding will be cancelled. Even before the earnings report, Harrison and Sandy Warner, Morgan's CEO, tried to assuage fears among their employees that the merger would be called off by sending them a letter saying everything was going as scheduled. Shakespeare might have said that "the lady doth protest too much."

In any case, the third quarter must have been a sobering experience for Harrison, and perhaps he'll consider a re-conversion back to greater respect for the Old Economy.

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