JPMorgan Retreats From Muni Derivatives

JPMorgan is exiting the municipal swaps business and closing nine of 19 regional offices devoted to tax-exempt capital markets, according to media reports.

The office consolidation "will affect about 15 people, most of whom will be given the option to relocate," according to Reuters. The bank reportedly will tighten controls within the tax-exempt capital markets unit, including reducing the use of external counsel.

The decision to stop selling interest-rate swaps to state and local governments stems from mounting legal and regulatory fire over undisclosed fees and misleading advice to municipalities in connection with several swap deals that the bank put together. Other banks are under scrutiny for their roles as well.

While JPMorgan aims to limit reputational damage from its derivatives dealings, the exit could undermine its heretofore strong position in municipal bond underwriting.

An internal memo from bank executive Matt Zames, quoted by various newswires Thursday, said "The risk/return profile of this business is such that the returns no longer justify the level of resources we have allocated to it." Zames is head of rates, foreign exchange and municipal bonds.

According to Bloomberg News, the Justice Department is probing at least seven former JPMorgan bankers as part of a criminal investigation of whether banks conspired to overcharge local governments on swaps and other derivatives. Separately, JPMorgan was sued last week by the Erie, Penn., school district over swap fees, and faces a possible suit by the Securities and Exchange Commission which is investigating the bank's sales of derivatives to municipalities.