Mellon Bank Corp. has responded to losses in securities lending at its Boston Co. subsidiary by moving oversight to its more conservative Pittsburgh headquarters.

The bank has also reportedly dismissed two Boston Co. employees.

"What we have to correct here is, really, that their investment management for securities lending was unacceptable," said Melon chief financial officer Steven Elliott.

The move was made in response to Monday's announcement that Mellon will take a $130 million after-tax charge in the fourth quarter to cover losses in securities lending portfolios at the Boston Co. The portfolios were hit hard by the November spike in interest rates.

News reports Tuesday revealed that Mellon had fired Jacob Navon, senior vice president, cash management, and his assistant, Glenn Davis. Mr. Navon joined the Boston Co, in 1990 after leaving Salomon Brothers, where he was a trader.

Mellon acquired the Boston Co. in 1993.

Mellon would not confirm the firings. "We're not discussing personnel issues," said Margaret Cohen, a Mellon spokeswoman.

Securities lending involves loaning instruments included in client trust accounts to broker-dealers, who are paid a rebate based on overnight interest rates. The broker-delears put up cash collateral, which the banks invest, betting that the money earned on the investments will be greater than the rebate.

Banks usually invest in bonds that do not mature beyond 90 days, but Mellon invested in bonds with maturities as long as two years, said one source. Analysts were shocked and dismayed by the size of the charge, which will cause the bank to report a 69% drop in fourth-quarter earnings.

"Why wasn't it discovered prior to this?" demanded Keefe, Bruyette & Woods' Joseph Duwan. "If it was why did the company wait until yesterday after further rate increases?"

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.