Monday, March 19, 2007

JP Morgan Chase & The Strange Case of Pakistan Steel

JP Morgan Chase (NYSE:JPM) may have found itself foolishly caught up in the latest of Pakistani political events. JP Morgan has been reported as acting as an advisor to the Pakistani government on privatization. They have also acted as an advisor to an investor group that is buying Pakistan Steel for approximately $362 million. The group consists of Al Tuwairqi of Saudi Arabia, MMK JSC of Russia and Arif Habib which is a well connected Pakistani financial concern.

Pakistan Steel Mills holds a virtual monopoly in Pakistan and many observers feel that its true value is approximately $5 billion; a far cry from the winning bid of $362 million. The auction process was clearly rigged for this group to win. Other steel makers found themselves disqualified for a variety of reasons.

The deal came to the scrutiny of Pakistan’s Chief Justice Iftikhar Mohammed Chaudhry who wanted to know why the long-suffering people of Pakistan are being cheated. The Chief Justice has also made many inquiries and negative comments about many other issues in the Government of President Pervez Musharraf. Being a military dictator Musharraf has orchestrated a judicial review regarding some charges which are still not clear.

The judicial review effectively removes the Chief Justice from office. The legal community has take to the streets and police are actually bashing in the heads of normally peaceful lawyers. Some feel the last straw for the Chief Justice was his open questioning about the legitimacy of the Pakistan Steel deal.

JP Morgan may find itself shut out of any financings in the steel business. Other steel companies must acquire assets at true market value. The current privatization is at seven cents on the dollar. You can only dream of that capital cost structure. As the steel business becomes increasing competitive and globalized that cost structure will be an enormous advantage.

If I was a steel company CEO/CFO JP Morgan would not be my friend. If I was a citizen of the world I would be very worried about a key partner in the war against terror who has managed to unnecessarily energize extreme Islamic parties with a legitimate cause of gross corruption.

I know JP Morgan probably has a very sanitized document trail about its own involvement. But when you help in attempting to create a powerful competitor with a ridiculously low capital cost as a result of political malfeasance you have got to believe a few lines in the sand have been drawn.