FTAlphavilleFT Alphaville is a 2008 Webby Award Winner

• News
• Markets Live

Imagine for a moment that you are an investment banker in London, says the FT’s Gillian Tett in her Insight column. A Greek government official appears, asking you to do a €280m top-secret structured bond deal to fund military procurement. Then a hedge fund with strong Greek connections pops up, which conveniently agrees to buy the entire bond at a good price - also secretly. Should some alarm bells ring?

A version of this debate is most likely swirling around the corridors of the mighty JPMorgan. In recent weeks a political melodrama has exploded in Athens about the fact that Greek state pension funds have been buying complex structured products in recent years, at inflated prices.

Normally, this would barely merit a glance from Wall Street or the City. But one character in this Athenian drama is none other than JPMorgan. And the tale deserves wider notice as it poses awkward questions for any financial team pursuing business in the less sophisticated financial markets of Europe - be it Athens, Alicante or Archangel.

By way of (truncated) background, JPMorgan in February did a confidential €280m structured bond deal, with an associated swap, for a defence section of the Greek government. Normally such transactions never come to light. But these bonds were bought by local Greek pension funds at a price almost certain to produce future hefty losses.

When Greek opposition party politicians discovered this, the ensuing scandal prompted regulators to close some local brokerages and a minister to resign. For it transpired that Greek funds have bought numerous, similarly overpriced, instruments in recent years.

JPMorgan says it has behaved in good faith and never knew the bonds would be sold to pension funds. Indeed, the investment back apparently decided a few years ago to avoid direct dealings with Greek’s pension industry, precisely because it feared reputational risk.

The point of all this is, that as capital markets-centred finance spreads across Europe, some of its wilder corners are becoming more important for investment banks, not to mention the City’s revenues. For in addition to juicy privatisation or listing fees, financial reform is creating opportunities to sell higher-margin products in unexpected places. Never mind about unusual Greek bonds or Russian flotations; just look at the booming business of selling wacky instruments to the German Mittelstand.

But it is a rule of finance that high margins tend to carry risk, which in transitional countries is often of the reputational kind. And while investment banks undoubtedly make efforts to mitigate this risk, the Athenian saga suggests this is rarely bulletproof.

JPMorgan, in other words, may be in the spotlight today, but its rivals shouldn’t smirk. After all, the Greek government is now threatening to probe the other 50-odd structured deals apparently sold to its pension funds since 1999. And who underwrote those? Some of the City’s finest names.