Oct. 23 (Bloomberg) -- JPMorgan Chase & Co. is the biggest investor in the two sales this year of bonds backed by U.K. residential mortgages, as the New York-based lender snaps up the type of assets behind losses at other banks.

JPMorgan bought or committed to buy 2.25 billion pounds ($3.7 billion) of notes issued by vehicles of Lloyds Banking Group Plc in September, the first in more than a year, and Nationwide Building Society, according to e-mailed presentations the issuers sent to investors. JPMorgan, which navigated the worst seizure in credit markets in decades without a quarterly loss, is also extending the banks loans backed by collateral of about 2.9 billion pounds of bonds, the presentations show.

JPMorgan approached Lloyds to issue the bonds and “provided the catalyst for us to start work on a new transaction as we then knew there was a deal to be done,” said Robert Plehn, the London-based head of securitization at Lloyds’s Bank of Scotland unit. The U.S. bank’s order “probably provided other investors with some confidence” to buy, he said.

Sarah Oppler, a JPMorgan spokeswoman in London, declined to comment.

Asset-backed securities pool assets such as home loans, credit-card receivables and vehicle leases, slice them into portions of varying risk and sell them to investors as bonds. The technique is intended to spread the different types of risk among various sets of buyers.

Financial Crisis

Spreading the risk failed when the U.S. subprime mortgage market, which provided loans to home owners with poor credit histories, collapsed in 2007, prompting investors to shun all but the safest assets. That helped cause losses and writedowns of more than $1.6 trillion among financial companies worldwide, according to data compiled by Bloomberg, and tipped the global economy into the deepest recession since the 1930s.

The extra yield that investors demand to hold top-rated U.K. asset-backed bonds rather than similar-maturity government debt soared to as much as 500 basis points in January, according to James Zanesi, an analyst at UniCredit SpA in Munich. That compares with spreads of 10 basis points to 20 basis points in the first half of 2007, Zanesi said.

Spreads have narrowed since the start of the second quarter. Permanent Master Trust 2009-1, a company established by Lloyds to sell bonds, priced 1.65 billion pounds of so-called class A2 notes to yield 180 basis points more than the London interbank offered rate, or Libor, last month. It also issued 750 million euros of class A3 debt to yield 170 basis points over the euro interbank offered rate. The yield gap is now about 130 basis points, according to UniCredit.

Capital Gain

Without taking into account funding costs, the capital gain on JPMorgan’s 1.25 billion-pound investment in Permanent’s bonds is about 25 million pounds in little more than three weeks, according to Zanesi.

JPMorgan has committed to buy 1 billion pounds of class A2 securities from Nationwide’s Silverstone 2009-1 trust and will accept 1.25 billion pounds of class A1 notes as collateral on a loan. The class A2 notes will be priced to yield about 145 basis points to 150 basis points more than Libor, according to a person familiar with the transaction who declined to be identified because the deal hasn’t been completed. The transaction is being marketed to investors now.

Justin Fox, the Northampton, England-based head of treasury markets at Nationwide, didn’t return phone calls seeking comment.

Manager Fees

JPMorgan is also garnering fees for helping manage the transactions, working with London-based Barclays Capital and Lloyds on the Permanent deal and with Barclays and New York- based Citigroup Inc. on Silverstone.

The U.S. bank posted its highest profit since the financial crisis started in 2007 this quarter, with earnings rising to $3.59 billion, or 82 cents a share, from $527 million, or 9 cents, in the same period a year earlier.

JPMorgan also helped manage the sale by Volkswagen Financial Services AG of 475 million euros of bonds backed by auto leases last month, without buying the notes. Lloyds, Volkswagen and Nationwide are the only three issuers to sell asset-backed bonds with portions offered publicly to investors this year, according to data compiled by Bloomberg.

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

Last Updated: October 23, 2009 11:05 EDT