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JPMorgan: The bank’s Chief Investment Office has been under the media microscope ever since the first stories emerged about the London Whale’s risky derivative trades last month. Today a front-page Journal story focuses the lens on the Special Investment Group, a team within the CIO that makes equity investments in distressed companies. This would seem an odd activity for a group within the CIO, whose job is ostensibly to manage risk, and the story says Matt Zames, the office’s new chief, is reconsidering whether the SIG belongs there. But later on in the story, there’s a quote from an SIG employee’s LinkedIn page that explains the group “seeks to take controlling stakes in companies J.P. Morgan has lent money to and are experiencing some degree of financial distress." So maybe you could argue that trying to get some upside in a bad situation where JPM is already exposed as a lender is a form of risk management? Though you could also argue it’s potentially throwing good money after bad. In any event, JPMorgan tells the Journal that the SIG doesn’t invest FDIC-insured deposits; the group is funded with debt and equity issued at the holding company level. In the Times, columnist Peter Eavis argues that JPMorgan doesn’t disclose enough about its hedges, value at risk measures, and other things investors would probably want to know right now. Also in the Times, economist Simon Johnson joins others in calling for JPMorgan CEO Jamie Dimon to step down from the board of the New York Fed. Johnson considers both sides of the issue at length, but he feels so strongly that Dimon should resign from the Fed board that he’s drafted an online petition.

Losing Steam: The FDIC’s Quarterly Banking Profile showed bank lending in aggregate declined on a quarter-to-quarter basis for the first time in nearly a year, an inauspicious development for the economic recovery. And while lending to big corporations kept rising, credit contracted in most other categories, including small business. The Journal’s “Heard on the Street” column takes a deep dive into the deposit data. Banks still have way more deposits than they can, or want to, lend out — loans as a share of deposits fell to a nearly 20-year low of 70%. But there are signs that large customers, which have been taking advantage of the TAG program’s unlimited guarantees for noninterest-bearing deposits (set to expire at yearend), are starting to feel confident enough to put the money to work elsewhere, the column says. Wall Street Journal, Financial Times

CSI, Wall Street: New York Attorney General Eric Schneiderman tells the Journal that he needs more hands for the special task force he’s heading up to investigate potential wrongdoing in the mortgage-backed securities market during the bubble era. "Do I want more resources? … Yes. Am I asking for more? Yes. Do I believe we'll get that? Yes." (Do we wonder why so many public figures talk this way? Yes.) Right now the state and federal task force has about 100 people. Another Journal story says Wells Fargo turned over to the SEC “hundreds of emails” and other documents related to its MBS business after the agency dragged the bank into court. The paper’s “Developments” blog reports on a Department of Justice website where people can submit tips about MBS fraud, with the promise of “substantial rewards” if the information helps the government to recover money. Bloomberg News got its hands on an SEC memo that said the agency’s staff completed its probe of possible fraud at Lehman Brothers without recommending enforcement actions. But the Times reports that charges are still possible, citing anonymice who said the memo is outdated.

Wall Street Journal

Another front-page story looks at the U.S. Department of Agriculture’s Rural Housing Service — specifically the mortgage program’s collection activities. The agency is aggressive in this area, garnishing federal tax refunds and Social Security checks before foreclosures are completed, and afterward pursuing deficiency judgments, which it’s allowed to do even in states where private lenders are not.

Money market funds, which had been tenaciously fighting any attempt at further regulation of their industry, are now open to a compromise with the SEC over its proposal for strengthened oversight. Though the fund companies still oppose the floating NAV and capital buffer requirements that the SEC wants, the industry can live with a watered-down version of the proposed limits on withdrawals.

Editor’s Note: The Morning Scan will not publish on Monday, May 28, Memorial Day. We’ll be back on Tuesday, May 29.

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JPMorgan: The FT analyzes JPMorgan's regulatory filings and infers that the bank takes more risk when investing excess liquidity — that is, cash that isn't being loaned out — than its megabank counterparts. Government-guaranteed bonds make up a smaller percentage of JPM's securities portfolio than at other large banks, for example. However, one FT reader protests in the comment thread that the conclusion trumpeted in the headline — "JPMorgan Takes More Risk than Rivals" — is overstated: "If you have a bigger securities portfolio and have excess liquidity then it wouldn't be unusual to buy corporate bonds. If your competitor has instead loaned to corporate customers, rather than buying bonds, then your balance sheet isn't riskier." (If this discussion gives you déjà vu, it may be because several hours before the FT posted its story yesterday, American Banker published an analysis by our data editor Harry Terris that similarly compared JPM's bond holdings to those of its competitors, and found the latter to more vanilla.) In the Journal, the "Heard on the Street" column identifies a pitfall of the portfolio hedging involved in JPM's recent $2 billion trading loss: fluctuations in the value of the hedges (if they are hedges — that's a matter of debate) flow through to earnings even when moves in the value of the assets being hedged don't. This "asymmetric accounting" (CEO Jamie Dimon's phrase) makes the true performance of the bank more opaque, even to its managers, the column says.

Too Big to Fail: Senator Sherrod Brown of Ohio is again pushing a bill to break up the largest banks. Writing in the Times’ “DealBook,” Richard Farley, a lawyer at Paul Hastings, critiques the lawmaker’s proposal and provocatively challenges widespread assumptions about the undesirability of too-big-to-fail institutions. “If next time [a crisis occurs] there are a great many smaller banks with bad loans that no one believes will be saved, will they all fail?” Farley asks. “This seems to look more like the Great Depression model than the current ‘safety net’ model that has served us well.” For those who dislike safety nets, Peter Wallison explains in a Journal op-ed why he and other free-marketeers believe the “systemically important” designation for large financial firms under Dodd-Frank only serves to enshrine too-big-to-fail status, and to create competitive advantages for those stamped with the scarlet SIFI: “When the [Financial Stability Oversight] council has declared that a firm is ‘systemically important’ — that its failure poses a threat to U.S. financial stability — the U.S. government is effectively saying that it will do whatever it takes to prevent the firm from failing. This means that a loan to a ‘systemically important’ institution is going to be safer than a loan to a smaller competitor without that designation,” and the giants thus enjoy a lower cost of funds than smaller banks. Nearby, an editorial in the Journal complains that by designating derivatives clearinghouses as SIFIs, as the FSOC “secretly” voted to do yesterday, the government is now putting taxpayers on the hook to eventually bail out those institutions, too.

Sallie Krawcheck: The former head of wealth management at Merrill Lynch continues to weigh in on the financial industry’s current straits. In an op-ed in the FT, she uses the JPM debacle as a springboard for a broader discussion of the inevitable complexity of big banks. Regulations like the Volcker rule err by trying to “fight complexity with complexity,” Krawcheck writes. “If regulators engage with the banks and regulate topic by topic — to stop this exact scenario from repeating itself — Wall Street will innovate businesses and trades that overtake their efforts every time, in search of new pools of profitability.” Rather, regulators should focus on the total amount of risk banks are taking on and the sufficiency of their capital to stand behind it, Krawcheck argues. She also recently had a piece in the Harvard Business Review offering four ways to fix the industry. For example, she suggests that boards judge CEOs not just by the bottom line but also by the components of earnings — how much of that net income is driven by satisfied customers who keep coming back versus the luck of the yield curve?

Wall Street Journal

Freddie Mac made Bank of America repurchase $330 million of mortgages written over the past two years, even though most of them are still performing. Why? Because the homes were appraised by a computer rather than by humans, whose judgment Freddie’s guidelines required for the loans in question.

Financial Times

“Institutional investors no longer trust banks to measure the riskiness of their assets and want regulators to take a much more prescriptive approach to setting capital requirements, a new report by analysts at Barclays has found.”

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More Morgan: Elephants indeed. Republicans on Capitol Hill have never forgotten that JPMorgan funneled the majority of its political donations to the Democrats in the 2008 campaign season, and though the firm has since stepped up its Republican giving, GOP lawmakers' patience with Dimon & Co. is wearing thin, the Wall Street Journal reports. Aside from the sour grapes, some Republicans worry that their efforts to roll back new financial regulations were made moot by JPMorgan's massive trading loss. "The argument that Volcker was absurd was building—greatly—and then this happened," says as unnamed Republican on the House Financial Services panel. … The Financial Times suggests that the JPM fallout will direct regulators' attention to the whole concept of portfolio hedging by banks (just in case the regulators needed a little extra nudging here). … The FT also has anointed the next likely successor to Dimon: he's 41-year-old Matt Zames, Ina Drew's replacement as head of the bank's chief investment office, and Dimon says he's the kind of fellow you'd want to share a foxhole with. … Also in the FT, JPM has retained the services of WilmerHale attorney William McLucas, a former director of enforcement at the Securities and Exchange Commission. … Over at the New York Times, the continued fallout over the JPM loss made for a good occasion to reconsider the raison d'être for big banks. The analysis piece argues that the financial industry's direct contribution to the broader economy is overstated, because the primary output measurement is based on the interest they charge for credit — something that has a habit of increasing when appetite for yield leads to increased risk-taking. … And Washington Post opinion writer Dana Milbank, reporting on Tuesday's appearance by Commodity Futures Trading Commission head Gary Gensler and other regulators before the Senate Banking Committee, says that JPM earned a "healthy dividend" on the $20 million it has spent on lobbying and campaign contributions in the past three years. He argues it's the regulators, not JPM executives, who are taking the heat from politicians over the firm's big trading loss.

Regulating Prepaid: The Consumer Financial Protection Bureau on Wednesday will announce that it plans to issue the first federal regulations governing the business of reloadable prepaid cards, with plans to develop standards for fee disclosures and fraud protection. The Wall Street Journal reports that the agency also may force issuers to alert consumers as to whether funds loaded on the card are insured by the FDIC or not. According to the New York Times, the CFPB also will hold a hearing Wednesday, in Durham, N.C., inviting testimony from big players in the card industry, as well as consumer advocates.

With Friends Like These: Morgan Stanley and other handlers on Facebook's initial public offering continued to catch flak as the press continued to pick apart the share sale. The Wall Street Journal suggests it was the last-minute decision to increase the share offering that doomed the deal. The FT, reporting on the subpoena Morgan Stanley received from the top securities regulator in Massachusetts, officially designates Facebook a "botched IPO," owing not just to the sinking share price, the questions about Morgan Stanley's communications to clients regarding its Facebook revenue forecasts in advance of the share sale, but also software problems at Nasdaq that caused a technical glitch in Facebook's market debut. A similar breakdown can be found in Dealbook, which reports that regulators "are concerned that banks may have shared information with certain clients, rather than broadly with investors."

Wall Street Journal

Over at the American Securitization Forum conference in Washington, Martin Gruenberg, acting director of the Federal Deposit Insurance Corp., was pulled aside by the press and asked whether the new rules around too-big-to-fail would really allow the agency to wind down a firm like … oh, let's just say JPMorgan, if the bank were to grow weak enough to pose a systemic risk. "Yes, I think we have the authority to manage that," he told the Journal.

Commerzbank AG is still 25 percent-owned by the German government, but CEO Martin Blessing said Wednesday at the firm's annual meeting that the Frankfurt-based bank hopes to resume paying a dividend for the 2013 business year. It hasn't distributed a shareholder payout since 2008.

Barclays has put its Italian branches on the block, and has thus far attracted three letters of interest in a deal, which, according to an unnamed source, would involve the equivalent of $5.13 billion in loans and another $5.13 billion in deposits.

Credit Agricole, still deeply regretting its 2006 purchase of Emporiki Bank of Greece, is looking for emergency loans again from—wait for it—the Greek central bank.

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Eating JPMorgan's Lunch: By now we've all read or heard about Mitt Romney's quote to the effect that if JPMorgan lost $2 billion, someone else made $2 billion. But who were those fortunate counterparties? The Journal reports that "about a dozen banks," including Bank of America and Goldman Sachs, have either directly or indirectly profited from JPM's soured trading positions. The article also identifies a handful of hedge funds that made money off the London Whale's miscalculations. Interestingly, Citigroup tells the Journal on the record that it didn't score gains from JPM's wrong bets. Meanwhile, Bloomberg News interviews the manager of one of the hedge funds that took the other side of a credit derivative trade from JPM. He tells the wire service his counterparty's losses could get worse — "if we end up with a catastrophe in Europe in the short run, they're probably not positions that anyone would want to have" — but adds he's "not looking to try and cause them any problem." It's not personal, Jamie, it's strictly business.

Gensler Flexes: In Congressional testimony, CFTC chief Gary Gensler cited the JPM trading loss as evidence that all derivatives involving U.S. firms, even transactions with overseas counterparties, must be subject to Washington's oversight under Dodd-Frank. Wall Street Journal, New York Times

Other Regulatory Fallout: A lengthy piece in the FT says the London Whale debacle could prompt regulators to rein in the practice of “portfolio hedging” using derivatives. The Times covers a public appearance by JPM chief Jamie Dimon at which he defended “legitimate” portfolio hedging but was uncharacteristically diplomatic in his comments on the Volcker Rule: “I don’t disagree with the intent. … Believe me, I’ve got the same interest” in preventing blowups. Another story in the FT reports that the Office of the Comptroller of the Currency, as JPMorgan’s regulator, is coming under fire. The bank and the agency have backpedaled from earlier indications that the London Whale’s trades would have been allowed under the Volcker Rule, had it taken effect (which it doesn’t until July 22, and even then, not really for another two years). The article reminds readers that the OCC has often been described as overly accommodating to banks in general, and quotes a former Treasury official as saying “there’s some sort of cultural and ideological capture at the OCC.” Hey, at least they’re not the OTS.

Buttressing the ‘Fortress’: Dimon also said JPMorgan would suspend a plan announced two months ago to repurchase $15 billion of shares. The Journal’s “Heard on the Street” column writes approvingly: “Discretion is the better part of valor. … Although Mr. Dimon likes to boast of J.P. Morgan's ‘fortress balance sheet,’ he must keep one eye firmly on looming capital requirements,” and the CEO had previously said that the London losses would make a small dent in one of its Basel capital ratios. Wall Street Journal, Financial Times, New York Times

New York Times

“DealBook” editor at large Andrew Ross Sorkin argues that Glass-Steagall would not have prevented the last financial crisis.

New York State financial superintendent Benjamin Lawsky’s seven month-old investigation of forced-placed homeowners insurance practices is zooming in on the two biggest carriers in that market. Lawsky is examining whether Assurant and QBE “effectively bought their dominant positions by paying kickbacks to banks disguised as commissions or other business,” the Times reports. The regulator said at a public hearing he’s thinking about “whether banning these relationships makes sense.” Sometimes, the insurers send payments to bank subsidiaries that have no employees, such as “Banc One,” a JPMorgan Chase vehicle named after one of the bank’s predecessors. Lawsky said at the hearing that this “just doesn’t smell right.” Just remember who first sniffed out that there would be trouble for banks in this area.

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Your JPMorgan Minute: Irvin Goldman, recently “relieved of his duties” (the Journal’s words) as chief risk officer at JPMorgan’s chief investment office after the $2 billion-and-counting blowup, has prior experience with trading losses. In 2008, he blew at least $10 million during a prior job at the bank as a trader, the Journal reports today. And before he joined JPMorgan, he was fired (the Journal uses the “f” word in this instance) from Cantor Fitzgerald in 2007 after the MBS unit he ran lost $30 million. And JPMorgan put him on leave eight months after he joined, while the NYSE’s electronic trading arm investigated his trading while at Cantor. He had been day trading certain securities for his own personal account that he was also trading with the firm’s money. (Cantor settled the probe for $250,000.) Of course, one learns by making mistakes, so perhaps JPMorgan could argue that these expensive blunders might have given Mr. Goldman an appropriately jaundiced eye for risks (both the market and regulatory kind), and thus justified giving him the CRO role, despite his reportedly scant experience with risk management. The fact that he is the brother-in-law of JPM’s head of corporate regulatory affairs might undermine such an argument, though. … A Times story reports that Ina Drew, JPM’s recently relieved chief investment officer, “began to lose her grip” on the unit a couple years ago after a medical issue necessitated her frequent absences from the workplace. With Drew less involved in the day-to-day, her underlings in New York clashed with their London counterparts over the latter camp’s increasingly risky trades. The Londoners prevailed, apparently through sheer will. Achilles Macris, the direct supervisor of the “London Whale” trader Bruno Iksil, comes off in this story as, well, a heel. … The Journal’s “Heard on the Street” column asks some disquieting questions about JPMorgan’s fiddling with its value-at-risk model during the first quarter: “Had the trade gone bad and someone didn't want the Var model to start alerting others to rising risk?” … The Times’ “DealBook” says the CFTC has joined the SEC and FBI in opening a preliminary investigation into the JPMorgan trading loss. … Politico’s Ben White reports that CFTC chief Gary Gensler will cite the JPM mess in a speech today on cross-border application of reforms to the swaps market. … In case you missed Paul Krugman’s Times column last week, in which he said the JPM loss shows the need for tougher regulation, his column this week says the JPM loss shows the need for tougher regulation. … Finally, though it’s not directly related to the beaching of the Whale, JPMorgan has returned $178 million to the bankruptcy trustee for MF Global. This cash was posted as collateral to JPM, which was MF Global’s lead bank, during the commodities brokerage’s waning days. The FT says the $178 million is not a part of that missing $1 billion-plus, which is evidently still missing.

Wall Street Journal

The Journal analyzes the compensation and performance of CEOs in a range of industries and finds that generally the captains of industry are properly compensated, but some deliver far more to shareholders than they take home, and some do the opposite. Citigroup’s Vikram Pandit is highlighted as one of the “highly paid” CEOs (in contrast to the “bargains”).

Financial Times

The SEC is opening up the market for covered bonds to a wider range of U.S. investors. The agency gave Royal Bank of Canada the all-clear to sell these mortgage-backed securities in what would be the first registered offering in this country. Rep. Scott Garrett of New Jersey and others see covered bonds as a way to bring back private capital in the housing market.

An article takes a broad look at efforts by regulators on both sides of the Atlantic to write resolution plans for large banks.