Volcker Rule Proponents Say JPMorgan Loss Bolsters Case

Volcker Rule Proponents Say JPMorgan Loss Bolsters Case
JPMorgan Chase & Co. headquarters in New York. Photographer: Jin Lee/Bloomberg

U.S. lawmakers and interest groups favoring tighter restrictions on proprietary trading said JPMorgan Chase & Co.’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. and Morgan Stanley, 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.


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