If Banc One wanted to manage its interest rate exposure without using swaps, what could it do? Specifically, how could it move from being asset-sensitive to either neutral or mildly...

For the exclusive use of T. SPHABMIXAY 9-294-079 REV: JULY 1, 2008 BEN ESTY PETER TUFANO JONATHAN S. HEADLEY Banc One Corporation Asset and Liability Management [Derivatives are] simply another Wall Street-developed house of cards. 1 — Representative Joseph Kennedy You can call it [the use of derivatives] whatever you want, but in my book it’s gambling. 2 — Representative Henry Gonzalez, Chairman, House Banking Committee Our use of derivatives is just one more step in the evolution of banking. — John B. McCoy, Chairman and CEO, Banc One Corporation On November 15, 1993, Dick Lodge, Banc One Corporation’s (Banc One’s) chief investment officer (CIO), gathered his notes and headed for a meeting with John B. McCoy, Banc One’s chairman and CEO. On the way, he recalled the lunchtime conversation on the golf course six weeks earlier, during which McCoy had first voiced concern over Banc One’s falling share price—from a high of $48 3/4 in April 1993 to just $36 3/4 (see Exhibit 1). McCoy attributed the decline to investor concern over Banc One’s large and growing interest rate derivatives portfolio. During their discussion in September, McCoy had asked Lodge, who was responsible for managing the bank’s investment and derivatives portfolio, to think about ways to deal with this problem. McCoy had been prompted into action not only by the continued price decline, but also by the comments of equity analysts who covered Banc One: The increased use of interest rate swaps is creating some sizable distortions in reported earnings, reported earning assets, margins, and the historical measure of return on assets. . . Were Banc One to include [swaps] in reported earning assets, the adjusted level would be 26% higher than is currently reported. . . . Given its large position in swap[s], Banc One overstates its margin by 1.31% [and its] return on assets in excess of 0.20%. . . . Adjusted for [swaps], Banc 3 One’s tangible equity-to-asset ratio...