Political oddsmakers are working overtime to assess the chances of stronger bank regulation in the wake of JPMorgan Chase & Co.'s announcement last week of a $2 billion loss on a bad derivatives bet.
“The whole notion of re-establishing trust in the bailed-out financial services system took a hit [Thursday],” said Kurt Schacht, managing director of the CFA Institute's Center for Financial Market Integrity. “We're a little stunned by it. It seems as if JPMorgan wanted to play it off as an honest mistake rather than engaging in precisely the types of behavior the Volcker rule is trying to limit.”
JPMorgan chairman and chief executive Jamie Dimon has been one of Wall Street's chief opponents of the Volcker rule, a provision of the Dodd-Frank financial reform law that would restrict proprietary trading by banks and other nonbank financial companies that are supervised by the Federal Reserve.
Rep. Barney Frank, D-Mass., ranking member of the House Financial Services Committee, said that JPMorgan's stumble undermines its criticism of the costs incurred by Dodd-Frank. Mr. Frank said that the bank estimated those costs at between $400 million and $600 million.
“JPMorgan Chase, entirely without any help from the government, has lost, in this one set of transactions, five times the amount they claim financial regulation is costing them,” Mr. Frank said in a statement Friday. “The argument that financial institutions do not need the new rules to help them avoid the irresponsible actions that led to the crisis of 2008 is at least $2 billion harder to make today.”
Mr. Dimon has said that the bank will be able to cover the loss, according to published reports.
There is no evidence that the massive losing bet on derivatives is destabilizing the financial markets. But the incident has renewed calls by Democrats in Washington for the implementation of a muscular Volcker rule.
Regulators have warned that they probably won't meet the July 21 deadline for finalizing the regulation. The Federal Reserve recently gave banks a two-year window to come into compliance with the rule, whenever it is promulgated.
Sen. Jeff Merkley, D-Ore., a member of the Senate Banking Committee, said that JPMorgan's derivatives position was inappropriate for a bank whose deposits are federally insured.
“This really is a textbook illustration of why we need a strong Volcker-rule firewall between traditional banking ... and hedge-style investing,” he told reporters during a Friday conference call.
In the same briefing, Sen. Carl Levin, D-Mich., said that Dodd-Frank allows banks to hedge particular assets but prohibits the kind of position that JPMorgan took.
“This kind of hedging on the direction of the economy is not allowed,” he said.
Mr. Merkley and Mr. Levin said that so-called portfolio hedging, which is how they describe JPMorgan's moves, exists in the draft Volcker rule. They urged regulators to change the language so that it conforms to congressional intent before issuing a final rule.
"BRIGHT LINES'
“You need bright lines, and you can't have loopholes like portfolio hedging,” Mr. Merkley said.
JPMorgan's stumble has given Democrats more leverage to fight what they claim are industry attempts to water down Dodd-Frank.
“The fact that this can happen at a bank with a solid reputation like JPMorgan is evidence that our banking regulators must remain vigilant, and why opponents of Wall Street reform must not be allowed to gut important protections for the financial system and taxpayers,” Senate Banking Committee Chairman Tim Johnson, D-S.D., said in a statement.
House Financial Services Committee Chairman Spencer Bachus, R-Ala., Sen. Richard Shelby, R-Ala., ranking member of the Senate Banking Committee, and the Securities Industry and Financial Markets Association — all Volcker rule skeptics — weren't immediately available for comment.
JPMorgan's problems may end up benefiting investment advisers, one financial planner said.
“The more that Wall Street slips up, the more people will look for the objective advice that RIAs provide,” said Sheryl Garrett, founder of Garrett Planning Network Inc.
“I don't wish ill on anyone, but Wall Street is dysfunctional. Average Americans see Wall Street and Main Street as very different,” she said. “This does not look good for Wall Street.”
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