JP Morgan to exit municipal swaps -Bloomberg

Sept 4 (Reuters) - JP Morgan Chase & Co will stop selling interest-rate swaps to government borrowers in the $2.6 trillion U.S. municipal bond market roiled by an antitrust probe and the near bankruptcy of Alabama's most-populous county, Bloomberg reported.

"The risk/return profile of this business is such that the returns no longer justify the level of resources we have allocated to it," Bloomberg quoted Matt Zames, JP Morgan's head of rates, foreign exchange and municipal bonds from a memo to employees.

JPMorgan will stop selling interest-rate derivatives to local governments, though it will continue to market the products to non-profit customers such as hospitals, it said in the memo.

Wall Street marketed unregulated derivatives as a way for municipalities to save money. The financing backfired this year as fallout from the global credit crisis caused borrowing costs to soar.

JPMorgan is among the banks that are holding Jefferson County bonds under an agreement to act as buyers of last resort, and may suffer losses in the event of default.

The New York-based bank also disclosed that the U.S. Securities and Exchange Commission may sue the bank in connection with an investigation of derivatives, the online news agency said.

Derivatives are contracts whose value is derived from tradeable securities or linked to future changes in lending costs.

Sales of derivatives to cities, towns and school districts provided banks with fees as earnings from arranging sales of tax-exempt bonds used to build schools, roads and other public works.

JP Morgan was not immediately available for comment. (Reporting by Sweta Singh in Bangalore)