Dimon Says Volcker Rule May Have Cut Credit-Derivatives Loss

JPMorgan Chase CEO Jamie Dimon
Jamie Dimon, chief executive officer of JPMorgan Chase & Co., listens during a Senate Banking Committee hearing in Washington, D.C. on June 13, 2012. Photographer: Andrew Harrer/Bloomberg

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said a proposed U.S. ban on proprietary trading may have limited the bank’s derivatives-trading losses of at least $2 billion.

“It may very well have stopped parts of what this portfolio morphed into,” Dimon said, referring to the so-called Volcker rule during testimony at the Senate Banking Committee today. “It’s possible. I just don’t know.”

Dimon has been among the most vocal bankers in challenging stricter regulation as lawmakers seek to prevent a repeat of the credit crisis that led to bailouts of some of the largest financial firms. The CEO publicly asked Federal Reserve Chairman Ben S. Bernanke last year if he “has a fear like I do” that overzealous regulation will hinder an economic recovery.

The timing of New York-based JPMorgan’s blunders “plays right into the hands of a bunch of pundits” who are pushing for tighter oversight, Dimon said on May 10, when he announced the trading loss.

Five U.S. regulators are preparing to complete the so-called Volcker rule ban on proprietary trading and limits on investments in private equity and hedge funds. The rule, named for former Fed Chairman Paul Volcker, is intended to reduce risky trading by banks with federally insured deposits and access to the central bank’s discount window.

Softening Urged

JPMorgan, Goldman Sachs Group Inc. and other banks have urged regulators to relax parts of the 298-page rule.

Dimon testified that the bank’s chief investment office, the source of the trading loss, is set up to invest money and earn income. “This particular synthetic credit portfolio was intended to earn a lot of revenue if there was a crisis,” Dimon said. “I consider that a hedge.”

The bank’s losses have spurred debate over whether hedging of aggregate or portfolio risks should be allowed. Fed Governor Daniel Tarullo said June 6 that regulators will include “substantive guidelines” to distinguish between hedging and proprietary trading.

‘Explain Themselves’

“If a firm said we are doing this because it is a hedge, they would be required to explain to themselves, importantly, as well as to the primary supervisor, what the hedging strategy was” and make sure it didn’t create new exposures, Tarullo said.

Dimon acknowledged he has trouble making a bright-line distinction between proprietary trades and hedges. Hedges of portfolio or aggregate risks should be allowed under the Volcker rule, he said.

“Portfolio hedging, which I think should be allowed, is something that will protect the company in bad outcomes,” Dimon said. “It doesn’t mean you’re always going to be exactly right, but you can analyze that.”

U.S. Senator Jeff Merkley, the Oregon Democrat pushing for tighter restrictions on banks’ bets, said this morning that JPMorgan’s hedges were too risky.

“Portfolio hedging is just a name for saying anything goes, and we’ll continue proprietary trading,” Merkley said in an interview on Bloomberg Television.

Merkley, who co-wrote the Volcker provision in the Dodd-Frank Act along with Senator Carl Levin, a Michigan Democrat, has said that regulators’ draft rule has loopholes that would allow banks to maintain much of their proprietary trading operations.

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