“J.P. Morgan Chase & Co., conceding it got overly caught up in the telecommunications bubble, said its third-quarter earnings will suffer from a spike in bad loans to that sector and a sharp drop in revenue as a result of weak financial markets,” writes Jathon Sapsord in today’s Wall Street Journal.

“The bad news presages more pain for a U.S. financial industry already hit by depressed stock prices and problem commercial loans. The scope of the problem likely won’t be known for about another month, when the majority of financial institutions begin reporting results for the quarter ending Sept. 30.”

“The outlook is cloudy. Both Standard & Poor’s Ratings Services and Fitch Ratings downgraded J.P. Morgan’s debt rating. Fitch cited ‘the sustained weakness in the core operating performance’ of a number of the bank’s important businesses, as well as ‘challenging conditions’ that are expected to continue.”

” ‘This is beyond embarrassing for the company,’ UBS Warburg analyst Diane Glossman said.”

“The continuing problems that J.P. Morgan has had in the telecommunications sector — which has been a worry for the bank for several quarters — will now raise concerns about results at other banks, which hold pieces of the loans that J.P. Morgan arranges.”

” ‘There might be some negative credit surprises coming out of this for the banking industry,’ said Reilly Tierney, analyst at Fox-Pitt, Kelton, an investment bank. ‘I think banks will be clubbed by investors.’ “

“Other lenders, though, may not be affected to as great a degree because J.P. Morgan was widely known to be perhaps the most enthusiastic lender to telecom companies. Analysts added that there also may be more bad news coming regarding loans to the energy and cable industries.”