JPMorgan links reverse notes to least-performing bank; AIG selling currency product through Lehman

By Kenneth Lim

Boston, April 7 - JPMorgan Chase & Co. kept alive the wave of financial sector-linked products with a series of reverse exchangeable notes linked to the worst performer of four banking stocks.

JPMorgan launched the 16% reverse exchangeables due July 31, 2008 linked to the least performing stock of Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and Merrill Lynch & Co. Inc.

The exchangeable will pay par of $1,000 at maturity unless any of the underlying stocks declines by at least 40% during the life of the notes and any of the underlying stocks finishes below its initial level. If both those conditions are met, the payout will be the number of shares of the least performing stock equal to $1,000 divided by the initial stock price.

"It would be interesting to see how much of these they manage to sell," a structured products distributor said. "It looks to be a rather risky product even if you could potentially get a good return if the loss conditions are not met."

The distributor said the risks for investors came mainly from the current state of the financial sector.

"We're in a period now where every quarter somebody's writing down something," the distributor said. "If Merrill Lynch, for example, writes down a few more billion, or if it reports another loss, there's a risk that its stock is going to fall again. This is a least-performing product, so it doesn't matter if some of the other stocks in the basket have held up better, like Bank of America and Citigroup because of their other banking businesses, because all it takes is one of your stocks to take a hit and your principal is at risk."

The distributor added that if one of the stocks breaks the barrier, there is a good chance the principal will be eroded.

"You're looking at essentially a three-month product," distributor said. "If one of the notes breaks the barrier tomorrow, you got to understand that it'll be more than 40% down, it's only got three months to climb back up if it's going to keep your principal safe. There's a pretty significant chance it won't climb back quick enough in three months. If the barrier is broken, chances are that other condition is also going to be met and you're going to lose on your principal. ... In a longer product you stand a better chance of still coming out on top if the barrier is broken."

For all the risk, the notes nevertheless have a generous coupon and barrier, the distributor said.

"The barrier is quite low, the interest at 16% annualized is not bad, so you are getting something for taking on that risk," the distributor said. "But that's typical of reverse notes. ... Investors who are looking for a better yield and think that all of the four stocks aren't going to fall below 40% of where they are now might find these interesting."

AIG offers notes through Lehman

American International Group Inc. plans to price a series of zero-coupon principal protected notes linked to a basket of Asian currencies due 2010.

Lehman Brothers Inc. is the underwriter of the offering.

The basket comprises equal weights of the exchange rates of the Indonesian rupiah, the Indian rupee, the Hong Kong dollar, the Malaysian ringgit and the Singapore dollar, all against the U.S. dollar.

The notes will pay par plus 1.5 to 1.7 times any positive return on the basket at maturity. If the basket is flat or lower than its initial level, the payout will be par of $1,000.

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