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What Did OCC, MF Global, and Ken Lewis Know, and When’d They Know It?

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Receiving Wide Coverage ...

Interest Rates: The recent and rapid flattening of the yield curve could put a renewed squeeze on banks’ net interest margins in second quarter results, the Journal’s “Heard on the Street” column warns. On the bright side (from the banks’ perspective), the FT notes that consumer mortgage rates have fallen more slowly than the rates on their benchmark instruments, Treasury and mortgage-backed securities, juicing the profit margins in mortgage banking. Also in the FT, an op-ed by Harvard professor and former Treasury Secretary Larry Summers advises those governments that can do so to issue more long-term debt to lock in the current, “epically low” interest rates.

JPMorgan: Lawmakers want to know what the Office of the Comptroller of the Currency knew about JPMorgan Chase’s money-losing trades, and when the regulators knew it, the Journal reports. On Friday, Ohio Democratic Senator Sherrod Brown fired off a letter demanding details from Comptroller Thomas Curry, and Curry’s agency is expected to be the focus of a Senate Banking committee hearing on the JPM loss Wednesday. Continuing the OCC-as-lapdog theme we’ve seen throughout the media coverage of recent weeks, the Journal’s story includes this quote from a law professor: "The OCC has historically been thought to be sympathetic to banking interests.” Curry at least can plead he’s “the new guy,” having started as Comptroller in April, months after JPM’s “London Whale” trader, Bruno Iksil, had placed his ill-fated bets. If the OCC wasn’t worried about risk management at JPMorgan, at least one of the bank’s shareholders was; the Times reports that CtW Investment Group, which represents union pension funds, raised the issue more than a year ago and got the brush-off. Another Journal story looks at the debate over higher capital requirements for banks, and notes that JPMorgan, which had agitated against tougher rules, has inadvertently made the case for them. The vaunted “fortress balance sheet” had ample cushion to absorb that $2 billion loss, after all. “Capital is there to absorb unexpected loss, and this is clearly an unexpected loss," former FDIC chairman Sheila Bair is quoted as saying.

MF Global: In other JPMorgan news, the bank has returned $600 million to the bankruptcy trustee for MF Global, the Journal reports, citing anonymous sources. The trustee may pursue “as much as several hundred million dollars in additional claims” from JPM, which was MF Global’s main bank. In a separate update on Jon Corzine’s failed brokerage, the Journal says the feds’ investigation into what-the-MF-happened is zeroing in on a “false promise” made by the firm to officials at CME Group. Three days before MF Global went bankrupt, the article says, the firm assured the operator of the Chicago Mercantile Exchange (“its front-line regulator”) that it had a $200 million surplus in customer accounts, when in fact there was a deficit. That same day, the story reveals, a mid-level accountant was raising concerns internally about discrepancies in the books.

Wall Street Journal

The paper profiles Sandra Pianalto, the president of the Federal Reserve Bank of Cleveland, who is regarded as a kind of Sandra Day O’Connor of monetary policy — the “sensible center” of the polarized Federal Open Market Committee.

New York Times

Continuing the what-they-knew-and-when-they-knew-it theme, reporter Gretchen Morgenson finds a bombshell: Days before Bank of America’s shareholders approved the takeover of Merrill Lynch, the bank’s then-CEO, Ken Lewis, learned the brokerage’s losses were likely to be much worse than his company had projected in the proxy materials. This salient information was not communicated to shareholders before the vote, and the rest (including a second taxpayer bailout of B of A) is history. Lewis’ admission came out in court papers filed in a private shareholder suit.

 

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