Tags: Goolsbee | JPMorgan | Volcker | Rule

Former Obama Adviser Goolsbee: JPMorgan Fiasco Proves Need for Volcker Rule

Monday, 14 May 2012 11:50 AM

The $2 billion trading loss sustained by investment bank JPMorgan Chase highlights the need to implement the Volcker Rule, which would prohibit banks from making trades with their own money, says Austan Goolsbee, former chairman of the Council of Economic Advisers.

The rule, named after former Federal Reserve Chief Paul Volcker and part of the Dodd-Frank financial-reform law, has yet to be rolled out.

Speculative trades that cost banks money end up costing taxpayers money.

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"I do think the events in this case do highlight what Paul Volcker was aiming at in a major way with the Volcker rule is we know that commercial banks, the American taxpayer and government are on the hook through the FDIC, through the discount window, through a variety of insurance policies if something goes dreadfully wrong at a regular bank and we have to save them," Goolsbee tells CNBC.

"So they shouldn't be going out with money that's protected by the U.S. taxpayer and betting it for their own account. It doesn't make any sense."

Dodd-Frank co-author Barney Frank, the retiring Massachusetts Democratic congressman, echoed Goolsbee.

"I hope that the final rule will prevent this," Frank tells ABC News. "The Volcker Rule is still being formulated."

JPMorgan CEO Jamie Dimon has said the trade didn't violate the Volcker Rule due to the technical and hedging nature of the trade, as the loss didn't stem from a proprietary trade.

"This trading may not violate the Volcker Rule but it violates the Dimon principle," Dimon told NBC News just after the news broke of the massive trading loss.

Critics of the Volcker Rule say the measure creates uncertainty and won't work anyway, but many haven't shut the door on it.

"It's very complicated and unclear at this point as to how it will be workable," says a spokesman for Republican Sen. Richard Shelby, chairman of the Senate Committee on Banking, Housing, and Urban Affairs, according to U.S. News & World Report.

"[Sen. Shelby] may be open to some form of it, because he does support the fundamental principal of protecting taxpayers."

Still, big hedging losses like the one at JPMorgan concern everyone, both Democrats and Republicans alike, especially since JPMorgan enjoyed a reputation of being the responsible one of the big banks, coming through the financial collapse of 2008 much better than most of its peers.

Yet other experts point out that in such a global economy mired in uncertainty, big losses are going to be a fact of life, especially amid a time of low interest rates and surging liquidity levels, the product of central banks' collective policies to stimulate the global economy and get it out of the downturn.

"The broader message here may be that it is very difficult to manage risks in this global environment," says Yiorgos Allayannis, a professor of business administration at the University of Virginia's Darden School of Business, U.S. News & World Report adds.

"There's a tradeoff — the only way you cannot have losses is if you put the money in the bank and earn zero percent, but you have no return. By the mere fact that banks are in the business of loaning, there's going to be risk."

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Monday, 14 May 2012 11:50 AM
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