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, the co-author of the so-called Volcker rule and chairman of the Permanent Subcommittee on Investigations, said the New York-based bank’s disclosure yesterday served as a “stark reminder” to regulators drafting the proprietary-trading ban required by the 2010 Dodd-Frank Act.
“The enormous loss JPMorgan announced today is just the latest evidence that what banks call ‘hedges’ are often risky bets that so-called ‘too-big-to-fail’ banks have no business making,” Levin, a Michigan Democrat, said in a statement.
The Federal Reserve, Securities and Exchange Commission and Federal Deposit Insurance Corp. are among regulators drafting the so-called Volcker rule to limit bets banks can make with their own funds. JPMorgan, with other Wall Street banks including Goldman Sachs Group Inc. and Morgan Stanley, have lobbied regulators to expand exemptions included in a draft proposal released last year.
“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.
Levin and Senator Jeff Merkley, the Oregon Democrat on the Senate Banking Committee who co-wrote the provision, have used meetings and a comment letter to press regulators to tighten restrictions in the final rule, first proposed by former Fed Chairman Paul Volcker.
Asked about the JPMorgan disclosure, Julie Edwards, Merkley’s spokeswoman, said the loss “speaks for itself.”
The Volcker rule is intended to reduce the chances banks will put federally insured depositors’ money at risk. Wall Street firms have argued it is so broad and poorly defined it will force them to shed business lines and could increase risks for their clients.
“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.
JPMorgan Chief Executive Officer Jamie Dimon said that while the losses were “self-inflicted,” they may not have run afoul of the rule and don’t weaken arguments against the proposal.
“This does not change analyses, facts, detailed argument,” Dimon said yesterday on a conference call with Wall Street analysts. “It is very unfortunate. It plays right into all the hands of a bunch of pundits out there.”
Volcker, who testified to the Banking Committee on May 9, told reporters there was “no question” that lobbying from banks contributed to the complexity of the 298-page initial proposal released by regulators.
“I could give you stories all day about lobbyists making things more complicated,” Volcker said.
The Volcker rule allows banks to continue activities that are considered hedging, as well as to serve as market-makers, when firms accept the risk or hold shares of trades to facilitate client orders.
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.
JPMorgan’s disclosure “shows the need for financial reform, especially a strong Volcker rule, to limit such risky betting,” Dennis Kelleher, president of Better Markets, a non-profit group that advocates for tighter financial rules, said in a statement. “Too-big-to-fail banks like JPMorgan, with trillions in assets and trillions more in high-risk investments and trading, require regulation and transparency.”
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