The search was on for the leading corporate victims of Enron's bankruptcy even before there was a bankruptcy. Less attention has been devoted to an analytically more interesting question--which U.S. enterprise did Enron in its glory days most closely resemble?

We submit the name of the company in the headline (expanded to incorporate the silent partner in all U.S.-chartered banks with $800 billion balance sheets). Like Enron, J.P. Morgan Chase has reinvented itself as a trading business. Like Enron, Morgan is hard to analyze; there is significant spillover of derivatives-related information into the footnotes of its balance sheet. And, like the pre-Chapter 11 Enron, Morgan is an institution so eminent as to be almost above its counterparties' suspicion. Never mind too big to fail, as Morgan Chase certainly is. The newly amalgamated Morgan and Chase is sometimes viewed as too competent to disappoint.

We do forecast disappointment. It is an easy prediction, because it has already happened. William B. Harrison Jr., chairman and CEO, personally assured it in the 2000 annual report: "We have set as long-term goals for the company annual revenue growth of 10% to 12%, cash earnings per share growth of 15% per year and an average cash return on equity of 20% to 25%." How would this be accomplished? "We now have the capability to fulfill our clients' needs with any financial transaction, anytime, anywhere in the world. One plus one will significantly exceed two in the equation."

When a banker proposes that one plus one equals something bigger than two, we may infer something. What we may infer is that he or she is about to drive the family Cadillac into the country-club swimming pool. In 1973, during the Nifty Fifty boom, Walter B. Wriston, chairman of the forerunner to Citicorp, amazed Wall Street by declaring a target for earnings growth of 15% a year. ("We intend to sell every financial service everywhere in the world where we can do so legally and at a profit," said Wriston, who deserves a citation in the Morgan document.) Banks were then viewed as regulated public utilities. Depression-era regulation was still in force (and would be until the signing of the disturbingly titled "Banking Modernization Bill," Nov. 12, 1999). No major bank had dared to promise what Wriston did. And, in fact, over the sweep of years, Citi had come nowhere close to delivering it. From 1900 to 1972, cumulative net income had totaled $201 million. If earnings had met Wriston's 15% target over the same span of time, cumulative profits would have totaled $28.1 billion.

As credit is cyclical, so is the profitability of lenders. So is the competition to lend. To achieve a rate of return even modestly in excess of the risk-free rate, a bank must bear some risk. To achieve a 20% to 25% return on equity--a towering premium to a 5% risk-free rate--Morgan Chase must do things that other banks wouldn't or couldn't.

What are these things? Nothing jumps out of the lending side of the business. At last report, one-third of the commercial loan book was to borrowers below investment grade. "Management currently believes that credit conditions in the United States will remain challenging for the remainder of the year, which could have an adverse impact on credit quality over time," says the September 10-Q report. So far, so bland.

But Morgan is no more a traditional bank than Enron was a garden-variety energy company. Net interest income, the bread and butter of plain banking, accounted for just one-third of total revenue in the 12 months ended September 30. Investment banking fees, trading revenues, fees and commissions contributed the lion's share.

So dominant is Morgan Chase in the derivatives markets that its exposures look like typographical errors. At June 30, according to the Office of the Comptroller of the Currency, the notional amount of derivatives contracts of Chase Manhattan Bank and Morgan Guaranty Trust was $29.3 trillion; combined net credit exposure was $94.7 billion. Comparing these numbers with those disclosed by the company at year-end 2000 shows a sizable ramp-up in derivatives activity and derivatives credit exposure. On Dec. 31, 2000, net credit exposure represented 181% of equity and 289% of tangible equity. At June 30, 2001, it was 223% and 361%, respectively. By comparison, Citicorp hardly participates. At June 30, its derivatives credit exposure amounted to a mere 70.5% of its tangible equity.

Morgan Chase isn't the only bank in the derivatives markets any more than the LDP is the only political party in Japan. However, at June 30, according to the OCC, the combined Morgan and Chase were credited with the following (expressed as a percentage of the relevant 367-bank reporting sample): 61% of the notional amounts of all derivative contracts; 64% of the notional amounts of all credit derivative contracts; 58% of all netted credit exposure.

A 16-page exposition on risk in the first annual report of the new amalgamation attests to the determination of the management not to go the way of its debtor-in-possession clientele (of which the latest is Enron). However, as colleague Jay Diamond points out, systems for measuring and managing risk are designed by human beings who see just as far into the future as the rest of us. In the face of September 11, the bursting of the high-tech bubble or the vaporization of Enron, such methods as even the best bankers devise may constitute so many Maginot Lines.

Morgan's best, after all, conceived and executed JPMorgan Partners, a New Economy venture capital and private equity investment cell. "In 1999," Diamond relates, "JPMorgan Partners had operating earnings of $1.8 billion on revenues of $3.05 billion, 23% and 10%, respectively, of companywide totals. Cash return on the common equity allocated to JPMorgan Partners was about 30%. Since those heady days, JPMP has turned into what a guy on my high school soccer team called a weak teammate: 'Samsonite,' as in something to be lugged around. It generates negative revenues--($179 million) in the latest quarter--and negative operating earnings--($155 million) in the latest quarter. Because of JPMP, fully 14% of the company's equity (as allocated by the company) generates a negative return. So heavy has this New Economy baggage become that the company now presents its earnings before and after JPMP."

If credit losses in the current recession turn out to be no worse than those of a decade ago, portfolio-wide charge-offs will peak at about 3%. The cost for Morgan Chase will run to $17 billion, equivalent to 62% of tangible book, observes Charlie Peabody, bank analyst virtuoso at Ventana Capital. If that is all, Morgan Chase can, in good conscience, return its Enron look-alike award. It will have weathered an ordinary cycle.

However, we think, there is an excellent chance this will be no ordinary cyclical downturn, but something worse (as the preceding upturn was something zanier). Morgan Chase is a bull market institution. It entered the downturn as if for an upturn. "There is tangible excitement within the corridors of this new company," stated the 2000 annual letter to shareholders. "[A]nd, while it remains a challenging environment with plenty of solid competitors, we believe that JPMorgan Chase has the best long-term platform to compete and win." To which we ask, win what?

Possibly, in the flush of competition, the new Morgan Chase has taken on an extra few billion in ill-advised credit risk, or absorbed that marginal trillion dollars in unnecessary notional derivatives exposure. A layman may wonder: Is the bank any better at analyzing counterparty risk than it was at handicapping technology? For a long time, Enron was everybody's favorite counterparty.

Morgan Chase is not everyone's favorite bank, to judge by the relative performance of its share price. However, we think, there is a limit to how far it will fall. Think of the bank as a government-sponsored enterprise. It's Fannie Mae or Freddie Mac, quasi wards of the state--but with a much bigger derivatives book.