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Fed reviews JP Morgan's Enron dealings

US banking regulators are reviewing how Wall Street bank JP Morgan Chase & Co accounted for certain trades made with bankrupt energy trader Enron Corp, according to a memo obtained on Friday.

News of the review by The Federal Reserve Bank of New York sent shares of the venerable bank to a three-year low. The stock, the second-most active on the New York Stock Exchange, dropped more than 5 per cent to $27.65, a level unseen since October 1998.

The review, first reported in The Wall Street Journal, centres on a JP Morgan offshore entity called Mahonia, which traded oil and gas with Enron. Mahonia is also the focus of a heated legal battle between JP Morgan and a group of its insurers.

At issue is whether the trades should have been booked as loans, and if the arrangement was just another questionable investment vehicle devised by Enron, according to the Journal. Enron's spectacular collapse has been linked to its sketchy bookkeeping and off-balance-sheet dealings.

The Fed raised questions about certain natural gas and crude oil trades between Mahonia and Enron in a January 24 memo, which sources called routine.

The Fed is reviewing "two prototypical prepaid forward transactions," the memo said. In the transactions, JP Morgan would pay Enron for the future delivery of natural gas and crude oil.

"As part of our normal banking supervisory role we need to understand what is happening at the institutions we supervise," said a Fed spokeswoman.

She said the Fed would be asking questions at institutions with exposures so that it can understand the nature of those exposures and their accounting treatment.

"As a general matter, banks are permitted to deal in prepaid forward transactions," she said.

JP Morgan also said it was a normal course of action.

"It is perfectly normal for the Fed, in the course of its ongoing and continuing review of the banks it supervises, to seek information on high-visibility issues or transactions," a JP Morgan spokeswoman said. "In all of our dealings with the Fed, we co-operate fully."

The Fed also discussed the trades with JP Morgan's accountant, PricewaterhouseCoopers, the memo said. A spokesman for the auditor declined to comment.

JP Morgan used Mahonia to set up trades in which it would pay Enron for future delivery of gas and oil. JP Morgan had backed up the deals with surety bonds -- which insure that if the deals weren't completed, the bank would still get paid.

But the insurers, which include Chubb Corp, Citigroup Inc's Travelers unit, Hartford Financial and St. Paul Cos, claim Enron misled them about the nature of the deals. The group is disputing JP Morgan's insurance claims.

JP Morgan has sued the insurers, which in turn filed a countersuit.

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