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London Whale Didn't Go Rogue, Computer Crushes Brokerage Firm

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Receiving Wide Coverage ...

The Computer Is Killing Brokerage Firms: Trading firm Knight Capital suffered $440 million in losses after its new software system went crazy and swamped the stock market with errant trades. The Times reports Knight bumped up against a deadline and used the software, designed to take advantage of a new Wall Street trading venue, before it had to time to work out the glitches. Fortunately, the market handled the malfunction; it was down less than 1% on Wednesday and Thursday. But the error has called attention to how (even more) perilous the stock market has become as a result of technological advancements and has some regulators clamoring for more controls to be instituted. The Securities and Exchange Commission and the Financial Industry Regulatory Authority are investigating the matter. According to the Times, some SEC officials are pushing for measures that would force firms to fully test coding changes before software is put to public use.

According to the Journal, the massive loss has put Knight Capital in survival mode. Analysts speculate the company, a veteran firm considered "a pillar of the stock market," could be done in by the glitch if it doesn't find financing within the next 48 to 72 hours.

Libor, Part 873: Well, at least, no one can say we're ignoring the Libor scandal. According to the Journal, the Royal Bank of Scotland is facing a number of lawsuits related to its alleged rigging of benchmark interest rates, including the London Interbank Offered Rate. The FT reports the bank has earmarked close to £50 million "to compensate small and medium-sized businesses mis-sold interest rate swaps" and another £135 million to reimburse consumers who were "mis-sold payment protection insurance," but has yet to make provisions for possible Libor repercussions. RBS says it has "sacked" an unspecified number of employees, following its internal investigation into the Libor scandal.

Draghi Pulls a Bernanke: One day after Fed Chairman Ben Bernanke said he plans to hold off on efforts to stimulate the U.S. economy, European Central Bank President Mario Draghi decided not to immediately implement a bold euro rescue plan to address Europe's debt crisis. Draghi did say the ECB was willing to buy government bonds to hold down borrowing costs in troubled countries — a marked departure, the Times notes, from current policy — but urged political leaders to act first. The bank said the bond buying was contingent on countries asking for help and would only take place after the European bailout fund exercised its power to purchase bonds. The FT reports borrowing costs for Spain and Italy surged and stock markets fell following Draghi's announcement.

Wall Street Journal

JPMorgan Chase's internal probe into its massive trading loss has determined the London Whale didn't really go rogue. A series of email and voice communications from March and April reveal Bruno Iksil, the trader largely blamed for JPMorgan's $5.8 billion loss, was encouraged by his boss Javier Martin-Artajo to mark the values of positions higher than they should have been. Martin-Artajo served as credit-trading chief for the company's Chief Investment Office. JPMorgan says both men have since left the bank and will be forced to relinquish compensation as the bank moves to recover from the losses, the Journal reports.

Citigroup shareholders are pushing the bank's current CEO Vikram Pandit to name a successor. Mike Corbat, the head of Citigroup's operations in Europe, the Middle East and Africa, is considered the lead contender. But don't expect a shake-up anytime soon. Pandit has told colleagues he plans to remain in his current post for several years.

New York Times

The Fed's decision to hold off on efforts to bolster the ailing economy certainly has consequences. As this DealBook piece notes, the choice effectively kills Wall Street's 2012 bonus season.

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(Image: Bloomberg News)

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