The former head of JPMorgan Chase’s (JPM) municipal derivatives sales is the target of a federal criminal investigation of possible anticompetitive actions in the municipal bond market, Bloomberg reports. Douglas MacFaddin was fired last month, Financial Industry Regulatory Authority records show, after he revealed he was a target of a Justice Department probe into Wall Street’s sales of derivatives and investment contracts to state and local governments, Bloomberg reports. MacFaddin is one of 10 current and former traders at JPMorgan and other banks who are being investigated.

The report doesn’t cite any specific deals as having drawn the scrutiny of prosecutors. But a number of cases have come to light recently in which small-town financial officials seem to have gotten in over their heads with exotic Wall Street financing methods. Back in February, Bloomberg reported that the Erie school board had to pay JPMorgan $2.9 million to get out of an interest-rate swap that went sour earlier this decade. And just this month, officials from Jefferson County, Ala., met with federal officials in a bid to stave off a bankruptcy filing, after the county ran into trouble tied to its own bad bets on interest-rate swaps. The good news, such as it is, is that so far the county - home to the state’s biggest city, Birmingham - hasn’t had to resort to a bankruptcy filing.

JPMorgan Chase (JPM) isn’t resting on its laurels. Less than a day after posting first-quarter numbers that set off a sharp rally on Wall Street, the bank sold $6 billion in non-cumulative perpetual preferred shares, Bloomberg reports. The cash won’t come cheap: The shares will pay a fixed 7.9% dividend for 10 years, and a floating rate after that. JPMorgan stock was down fractionally in trading Thursday.

In joining rivals such as Lehman Brothers (LEH), Wachovia (WB) and Washington Mutual (WM) in raising new capital this month, JPMorgan is showing that it’s not getting swept up in talk that CEO Jamie Dimon has the credit crunch all figured out. Indeed, one of the bank’s self-described fans warned Thursday that investors shouldn’t rush into the stock, which has risen 22% in the month since JPMorgan agreed to buy Bear Stearns (BSC) in a Fed-arranged rescue. “My analysis at the moment is that this company is having a great deal of difficulty dealing with the current economic downturn,” Punk Ziegel analyst Richard Bove wrote. “Be cautious.”

JPMorgan Chase (JPM) keeps rolling along. The New York bank met Wall Street’s estimates Wednesday despite a 49% drop in first-quarter earnings. JPMorgan made $2.4 billion, or 68 cents a share, for the quarter ended March 31, down from the year-ago $4.8 billion, or $1.34 a share. The latest quarter included $1.5 billion in pretax sale proceeds on the initial public offering of shares of Visa (V), as well as a $2.5 billion addition to reserves for future credit losses. JPMorgan said its investment bank took markdowns of $2.6 billion, including markdowns on leveraged lending and prime, Alt-A and subprime mortgages.

The investment bank swung to a first-quarter loss of $87 million from a year-ago profit of $1.54 billion, while revenue dropped 52% from a year ago to $3 billion. JPMorgan attributed those declines to weak underwriting results and markdowns, offset partially by record revenue in rates and currencies.

“The Investment Bank had markdowns related to leveraged lending and mortgages and increased loan loss reserves,” said CEO Jamie Dimon. “Retail Financial Services again increased loan loss reserves related to home equity and subprime mortgages, as performance in these portfolios continued to deteriorate.”

The comments come on the heels of a surprise first-quarter loss at Wachovia (WB), which sharply increased its provisions for future credit losses. JPMorgan said its provisions for credit losses rose as well, but so far the firm hasn’t needed to resort to the dividend cuts and capital-raising seen at other big banks. Shares rose 3% in early trading.

“Our expectation is for the economic environment to continue to be weak and for the capital markets to remain under stress,” Dimon said. “These factors have affected, and are likely to continue to negatively impact, our firm’s credit losses, overall business volumes and earnings — possibly through the remainder of the year, or longer. However, we are prepared to manage through this down part of the economic cycle, given the strength of our liquidity, credit reserves, capital and operating margins, and to successfully position our company well for the future.”

 What doesn’t JPMorgan Chase (JPM) want to buy? The big New York bank, fresh off its fire sale acquisition of Bear Stearns (BSC), made an offer last week for Washington Mutual (WM), The Wall Street Journal reports. The Journal reports JPMorgan offered $8 a share for Washington Mutual after the Seattle thrift’s CEO, Kerry Killinger, called to say his firm needed to raise capital to cushion itself against future mortgage losses. As in the Bear Stearns case, in which JPMorgan initially offered $2 a share for a stock that just days before had fetched $60, the WaMu deal was to be a take-under: Even after a sharp selloff Friday, WaMu shares closed at $10.15, more than 25% above the opening JPMorgan Chase bid. Of course, WaMu eventually decided not to pursue the JPMorgan bid in favor of a recapitalization from private equity firm TPG - a decision that left the Morgan team up in arms. “WaMu, in the world’s worst way, did not want to do a deal with Chase and tried very, very hard to avoid engaging with Chase,” one person with JPMorgan Chase told the Journal. Not to worry, though: Falling house prices and a slowing economy should mean there’s no shortage of banks that will need JPMorgan’s help.

Update: Bear Stearns (BSC) shares plunged 27% Friday morning after the mortgage-heavy brokerage firm needed to be bailed out by a big money center bank with government backing.  

 JPMorgan Chase (JPM) agreed to provide the struggling broker with secured funding for 28 days. The financing will be backstopped by the Federal Reserve Bank of New York - the latest signal that federal officials are deeply concerned about the health of the financial sector and are trying to show investors that they will prevent big institutions from faltering. Bear Stearns admitted in its statement Friday morning that it was on the ropes before the deal came through.

“Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity,” CEO Alan Schwartz said in a company statement. “We have tried to confront and dispel these rumors and parse fact from fiction. Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated. We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations.”

The announcement comes a day after Bear Stearns shares fell as much as 17% amid worries the firm could collapse under the weight of declining values in the mortgage securities market. JPMorgan made a nod to those concerns in its announcement Friday morning. “Through its discount window, the Fed will provide non-recourse, back-to-back financing to JPMorgan Chase,” the bank said. “Accordingly, JPMorgan Chase does not believe this transaction exposes its shareholders to any material risk.”

JPMorgan also noted the possibility that mere financing may not be enough for Bear Stearns, whose shares have lost more than 60% of their value amid the ballooning mortgage problems of the past year. “JPMorgan Chase is working closely with Bear Stearns on securing permanent financing or other alternatives for the company,” JPMorgan said.

Even JPMorgan Chase (JPM) is disappointing investors this earnings season. The big bank said fourth-quarter profits fell to $2.97 billion, or 86 cents a share, from the year-ago $4.53 billion, or $1.26 a share. The 34 percent drop in net income left the bank shy of the 93-cent Wall Street analyst consensus estimate. Like Citi (C) before it, JPMorgan was hit by a sharp rise in money set aside to cover loan losses, particularly in its card business, where the provision for credit losses rose 40 percent from a year ago, and in its retail financial services unit, where the provision quadrupled. JPMorgan was also hit by a 35 percent drop in revenue at its investment banking unit, which was socked by a big writedown of subprime-related holdings and a sharp slowdown in the debt markets. Surprisingly, one area of strength was the company’s mortgage business, where revenue rose nearly tenfold from a year ago to $332 million.

But CEO Jamie Dimon, who has been widely lauded in recent months for steering clear of the collateralized debt obligation mess that has hobbled Citi and Merrill Lynch (MER), among others, spoke in Wednesday’s press release of the need to buckle down with the economy slowing. “We remain extremely cautious as we enter 2008,” he said. “If the economy weakens substantially from here – for which, as a company, we need to be prepared – it will negatively affect business volumes and drive credit costs higher. However, we feel well-positioned given the investments and actions we have taken over the past few years to improve our businesses’ operating margins, create a stronger systems infrastructure and build a fortress balance sheet.” With all the tumult in the banking sector, that fortress is likely to remain attractive to investors regardless of Wednesday’s earnings shortfall.

The 8 percent swoon in Citi’s (C) stock Tuesday shows that new chief Vikram Pandit has his work cut out for him. One curiosity, courtesy of Fortune’s Shawn Tully, is that Citi - the biggest U.S. bank by assets - finds itself in danger of slipping back into third place among the big banks as measured by stock market capitalization. At Tuesday afternoon’s prices, Bank of America (BAC) is the top U.S. bank, at $169 billion. Next comes Citi at $134 billion and then JPMorgan Chase at $131 billion. At the end of last year, Citi had $1.88 trillion in assets, compared with $1.46 trillion at Bank of America and $1.35 trillion at JPMorgan.

Of course, a lot has changed since then. All three firms have seen their shares hit since the debt markets seized up this past summer. But Citi stock has lost half its value over the past year, while its rivals have given up less ground - an early sign that investors are losing faith that the Citi ship can be turned around.