Federal investigators are examining links between JP Morgan Chase and disgraced energy trading group Enron that suggest the venerable US bank could have helped Enron disguise loans as part of its normal trading.

The evidence takes the form of a memo - first reported in the Wall Street Journal - from the Federal Reserve Bank of New York.

The memo, dated 24 January, raises questions about trades between Enron and an offshore company set up by Chase Manhattan Bank - now part of JP Morgan Chase - in the early 1990s.

The offshore entity, Mahonia, traded with Enron, paying it in advance for future delivery of oil and gas. The resources it used to do so came from JP Morgan itself.

While JP Morgan is not under any formal investigation - and the Federal Reserve is reported to have stressed that the inquiry is routine - the memo indicates the sensitivity among regulators to complex financial transactions as they try to work out how Enron could have collapsed so quickly.

The news has hit JP Morgan shares, already in the doldrums ever since results a month ago.

The bank's exposure to both Enron and the Argentine currency meltdown saw it report a loss of $292m for 2001.

By 1700 GMT, JP Morgan stock was down nearly 6% on the day at $27.41, a level last visited in October 1998.

Cash before delivery

The deals - known as "prepaid forward transactions" - are coming under the microscope partly because insurers say the deals were effectively off-the-books loans.

JP Morgan and other banks helped Enron set up the "special purpose entities" (SPEs) which are at the heart of the company's collapse.

Used as repositories for loss-making assets, the SPEs effectively flattered Enron's balance sheet, making the company seem much more successful than it was.

Banks invested in the SPEs alongside Enron, and were covered against the possibility of financial difficulties at Enron with hedges against Enron's own stock.

In Mahonia's case, insurance companies covered Enron's debts to Mahonia directly, but are now refusing to pay up the $1.1bn involved.