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2. Fannie Mae, Freddie Mac debate their future

JPMorgan Chase wasn't the only entity that emerged scarred from last week's Senate hearings.

The Office of the Comptroller of the Currency (OCC) fared pretty poorly as well. It has 70 staffers stationed inside of JPMorgan Chase, and yet it failed to sniff out the London Whale risks that were building to the point of no return.

Other regulatory bodies, including the Fed, have large presences within the bank. The Fed has 40 staffers on site, for example. But the OCC has been foremost on the hot seat. To its credit, it has accepted responsibility for its lapses.

But from its point of view, there were also some factors that made it hard to be successful. The Senate report makes clear that JPMorgan "hid losses for several months" from regulators and others, ignoring internal controls and manipulating documents. It often ran roughshod over examiners and others.

The Washington Post reports, that "When bank regulators wanted daily profit and loss statements from JPMorgan Chase's investment division, the bank initially refused. When examiners issued recommendations the bank didn't like, executives yelled and called the federal officials 'stupid.' At one point, the top brass at the prestigious bank ambushed a junior bank examiner, becoming "loud and combative" when he disclosed disputed results of an exam. Those incidents are part of a rare and detailed look into the interactions between Washington regulators and Wall Street, described in congressional testimonies Friday and a Senate report on a massive trading loss at JPMorgan.The documents and testimonies show a dynamic: Executives at the nation's largest bank at times bullied federal examiners. The examiners at times gave in."

For more:
- here's the article

Related articles:
Did JPMorgan CEO hold back data from OCC?

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By Jim Kim

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3. Are "say on pay" votes costing shareholders?

Most investors have left Fannie Mae and Freddie Mac for dead, as the future seems anything but bright for the housing GSEs, who have been in government receivership since September 2008.

The stocks were active this week, however, on news that the recapture of their massive deferred tax valuation allowances could allow them to repay government bailout money at some point, as noted by the TheStreet.com.

As of now, both entities remain penny stocks. But there is hope that perhaps the role of both will be preserved in some form or fashion, as regulators continue to hash out the possibilities.

The consensus as of now remains that some sort of wind down is in the cards. A group of Senators recently put forward the Jumpstart GSE Reform Act, which seeks to speed up the pace of reform.

"We know our housing finance system is not sustainable in its current form, and this legislation will keep us on a path to accomplish real reforms. We believe that as we transition Fannie and Freddie out of their present roles, we need to think about the system in its entirety," said Sen. Mark Warner, one of the sponsors of the bill, which might allow for smaller role by the GSEs.

At the same time, the FHFA is moving ahead with a program that would--somewhat ironically--marginalize the big two to a greater degree. The head of the agency, Edward DeMarco, issued remarks recently that underscored the agency's goals near term.

"We believe that setting up a new structure that is separate from the two companies is important for building a new secondary mortgage market infrastructure," he said in the remarks.

He added that, "Our objective, as we stated last year, is for the platform to be able to function like a market utility, as opposed to rebuilding the proprietary infrastructures of Fannie Mae and Freddie Mac. To make this clear, I expect that the new venture will be headed by a CEO and chairman of the board that are independent from Fannie Mae and Freddie Mac. It will also be physically located separate from Fannie Mae and Freddie Mac."

But as all this heads to some sort of conclusion, there may be some penny stock-like opportunities. Such speculation, however, rarely ends well.

For more:
- here's the article

Read more about: Fannie Mae, Freddie Mac
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By Jim Kim

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4. PwC slammed for its JPMorgan Whale trades

Will banks soon take a stand against proxy advisory firms?

The fact is that banks quake with fear when presented with the prospects of shareholders (driven in part by proxy advisory firms) voting against their executive compensation packages at annual meetings. While the votes aren't binding, they generate massive media interest and can easily spark litigation.

The best example recently was Citigroup (NYSE:C), which was roundly criticized for its pay package for then-CEO Vikram Pandit. Taking no chances for a repeat, the board has added performance shares to pay of top executives, including new CEO Michael Corbat.

But a lawyer for Jones Day, writing in the New York Times, puts forth a provocative question: What if these "say on pay" exercises are actually deleterious to shareholders?

It's not a random question, either. The author points to recent research by the Rock Center for Corporate Governance found that "revisions made by companies to their compensation programs in an attempt to conform to guidelines issued by proxy advisory firms actually produced a net cost to shareholders. As a result, the paper concluded, proxy adviser policies and influence had induced the companies to make compensation decisions that actually decreased shareholder value."

The costs can be high, as banks spend lots of time these days wooing top institutional investors, small institutions that happen to have large media followings, and of course the likes of Glass Day and ISS.

As annual meeting season looms, we'll likely see the same old song and dance, and in many cases that may produce a result that is just fine with the bank. But it's fair to say that proxy advisory firms wield more power these days, and there could be showdown looming with a large bank that just happens to disagree with them at some point.

For more:
- here's the item

Read more about: Annual Meetings, Say on Pay
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By Jim Kim

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5. JPMorgan Chase ponders new chairman

I noted recently that the Office of the Comptroller of the Currency (OCC) has faced some criticism for not failing to catch the London Whale "hedging" shenanigans, despite the fact that it has 70 staffers stationed inside of JPMorgan Chase. According to the much-publicized Senate report, the bank undertook subterfuge to deny OCC staff information. Still, there is still a sense that the agency could have done more.

But a well-known audit-firm expert, writing in Forbes, cites PwC as another example of an entity that should have done more. The firm, which has been the auditor for JPMorgan since 1965, has so far escaped attention in the unfolding drama. The Senate subcommittee that undertook the investigation did no interview it and the firm is mentioned only once in the 300 plus page report. The column notes that JPMorgan's internal audit group put together a report that was critical of the CIO office for the trades.

"The bank's external auditor, PwC, should be receiving copies of all internal audit reports and reviewing them for issues and concerns, especially ones that are not being addressed on a timely basis by management. I'd be surprised to learn an auditor with such a long and close relationship to its client did not react to the April-May 2012 media attention to the "Whale" trades and ask to be briefed about all reviews of the issue, including a special one by the Controller and the VCG's own internal review," according to the Forbes article.

In addition, "PwC should have received all OCC reports on the bank and been fully aware of all of the OCC's concerns about JPMorgan, not just related to the 'Whale' trades, and especially during 2012," it said.

At this point, PwC has to be concerned about the perception that it simply wasn't up to the task. Is this an argument for mandatory auditor rotation? Perhaps not. One could argue that a newby firm would have been even farther behind the learning curve, such that the results would have been the firm.

For more:
- here's the article

Read more about: Audit Firm, London Whale
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By Jim Kim

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