Hey, someone educate me here. What is the....... "and obviously the movable pin is in the right position."
There is a steel dowel pin in the oil gallery of some (maybe all) 261's that can be used to select either bypass or full flow filtering. If it's "out" (flush with the surface of the block) the system is set up for bypass. If it's driven in a certain distance(not sure how far) the oil gallery is blocked and the pipe-threaded ports are in series for full flow filtration. I've never tried to move the pin on my 261, but right now it's in the "bypass" position. I've heard they're VERY hard to move, with a possibility of cracking the block in the process.
Jerry