Volcker Rule Proponents Say JPMorgan Loss Bolsters Case
U.S. lawmakers and interest groups favoring tighter restrictions on proprietary trading said JPMorgan Chase & Co. (JPM)’s $2 billion loss on synthetic credit securities bolsters their case.
Senator Carl Levin, chairman of the Permanent Subcommittee on Investigations and co-author of the so-called Volcker rule, said the New York-based bank’s disclosure is a “stark reminder” to regulators drafting the proprietary-trading ban required by the Dodd-Frank Act.
“Regulators are under huge pressure by Wall Street and others to weaken the clear language in Dodd-Frank,” Levin, a Michigan Democrat, said today in a Bloomberg Television interview. JPMorgan’s trade is “clearly not permitted under the Volcker language.”
The rule named for former Federal Reserve Chairman Paul Volcker was included in the 2010 regulatory overhaul as a way to keep banks from putting federally insured deposits at risk. Wall Street firms including JPMorgan, Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS), have lobbied to expand exemptions included in their initial proposal, complaining that the measure is so broad and ill-defined that it will increase risks for clients.
“Their ability to shape the discussion in Washington, D.C., on the Volcker rule might have gotten materially set back,” David Hendler, an analyst at CreditSights Inc., said in an interview.
Tighter Restrictions
Levin and Senator Jeff Merkley, the Oregon Democrat who co- wrote the provision, have used meetings and a comment letter to press regulators to tighten restrictions in the final rule. Levin said that while he hadn’t decided whether the disclosure would lead to congressional hearings, it should underline the intent of the law for regulators drafting the final rule.
Julie Edwards, Merkley’s spokeswoman, said the JPMorgan disclosure “speaks for itself.”
Representative Barney Frank, the Massachusetts Democrat who co-wrote the regulatory law that bears his name, said the loss “obviously goes counter to the bank’s narrative blaming excessive regulation for the woes of financial institutions.”
JPMorgan’s travails may serve to undermine banks’ efforts to shape the Volcker restrictions as regulators including the Fed, Securities and Exchange Commission and Federal Deposit Insurance Corp. work to complete and implement the final rule,
“They’ve now just provided some ammunition, one would suspect, to the legislative and regulatory personnel who will just point at this and say, ‘It seems to me that these people don’t really have a good handle on what they’re doing,’” Satyajit Das, author of “Extreme Money: Masters of the Universe and the Cult of Risk,” said in a phone interview from Sydney.
Self-Inflicted Losses
Jamie Dimon, JPMorgan’s chairman and chief executive officer, said that while the losses were “self-inflicted,” they may not have run afoul of the Volcker restrictions and don’t weaken arguments against the proposal.
“This does not change analyses, facts, detailed argument,” Dimon said yesterday on a conference call with analysts. “It is very unfortunate. It plays right into all the hands of a bunch of pundits out there.”
Volcker, who testified at a Senate Banking Committee hearing on May 9, told reporters there was “no question” that lobbying from banks contributed to the complexity of the initial proposal.
“I could give you stories all day about lobbyists making things more complicated,” the former Fed chairman said.
The Volcker rule allows banks to continue activities that are considered hedging, as well as to serve as market-makers, accepting risk or holding shares of trades to facilitate client orders.
Hedging Exemption
Dimon said on the conference call that the original premise of the trades by the chief investment office was for the firm’s hedging. Synthetic credit products are derivatives that generate gains and losses tied to credit performance without the owner buying or selling actual debt.
Levin and Merkley, in their February comment letter, pushed regulators to tighten the exemption for hedging, calling some of what may be allowed a “major weakness” in the rule.
“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,” Frank, the top Democrat on the House Financial Services Committee, said today.
To contact the reporters on this story: Phil Mattingly in Washington at pmattingly@bloomberg.net; Bradley Keoun in New York at bkeoun@bloomberg.net.
To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net
Volcker Rule Proponents Say JPMorgan Loss Bolsters Case
Jin Lee/Bloomberg
JPMorgan Chase & Co. headquarters in New York.
JPMorgan Chase & Co. headquarters in New York. Photographer: Jin Lee/Bloomberg
May 9 (Bloomberg) -- Former Federal Reserve Chairman Paul Volcker speaks about financial market regulation and the Dodd-Frank Act rule bearing his name. He speaks before a Senate Banking subcommittee hearing in Washington. (Source: Bloomberg)
May 11 (Bloomberg) -- U.S. Senator Carl Levin, a Michigan Democrat and co-author of the so-called Volcker rule, talks about JPMorgan Chase & Co.'s trading loss and its implications for financial regulation. He speaks with Bloomberg Television's Peter Cook in Washington. (Source: Bloomberg)
May 11 (Bloomberg) -- David Marshall, an analyst at research firm CreditSights Inc. in Singapore, talks about JPMorgan Chase & Co.'s trading loss and its implications for the global banking industry. JPMorgan Chief Executive Officer Jamie Dimon said the firm suffered a $2 billion trading loss after an "egregious" failure in a unit managing risks, jeopardizing Wall Street banks’ efforts to loosen a federal ban on bets with their own money. Marshall speaks with Zeb Eckert on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)
May 11 (Bloomberg) -- Bill Blain, co-head of the Special Situations Group at Newedge Group Ltd., talks about JPMorgan Chase & Co.'s $2 billion trading loss and the outlook for the banking industry. He speaks with Manus Cranny on Bloomberg Television's "Last Word." (Source: Bloomberg)
May 11 (Bloomberg) -- David George, a bank analyst at Robert W. Baird & Co., talks about the outlook for JPMorgan Chase & Co. following the disclosure the company suffered a $2 billion trading loss. George speaks with Betty Liu and Dawn Kopecki on Bloomberg Television's "In the Loop." (Source: Bloomberg)
May 11 (Bloomberg) -- Jamie Dimon, chief executive officer of JPMorgan Chase & Co., and Bloomberg's Dawn Kopecki and Christine Harper talk about JPMorgan's $2 billion trading loss after what Dimon said was an "egregious" failure in the firm's chief investment office. This report also includes comments from Bloomberg Television contributing editors William Cohan, Thomas Brown and Neil Barofsky, Portales Partners' Charles Peabody, Aegis Capital's Stanley Crouch, Fifth Third Asset Management's Keith Wirtz and Rochdale Securities' Richard Bove. (Source: Bloomberg)
U.S. Senator Carl Levin
Andrew Harrer/Bloomberg
U.S. Senator Carl Levin.
U.S. Senator Carl Levin. Photographer: Andrew Harrer/Bloomberg
Former Fed Chairman Paul Volcker
Andrew Harrer/Bloomberg
Paul Volcker listens to a question during a Senate Banking Committee hearing in Washington.
Paul Volcker listens to a question during a Senate Banking Committee hearing in Washington. Photographer: Andrew Harrer/Bloomberg
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