Shock from JP Morgan is new fodder for reformers

It didn’t take long for bank reformers to say we told you so. JPMorgan Chase’s $2 billion trading loss,which was disclosed

Written by New York Times | New York | Published:May 12, 2012 2:53 am

NELSON D SCHWARTZ

It didn’t take long for bank reformers to say we told you so. JPMorgan Chase’s $2 billion trading loss,which was disclosed on Thursday,could give supporters of tighter industry regulation a huge new piece of ammunition as they fight a last-ditch battle with the banks over new federal rules that may redefine how banks do business.

“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,” said Senator Carl Levin,a Michigan Democrat who co-wrote the language at the heart of the battle between the financial and government worlds,in a statement. “Today’s announcement is a stark reminder of the need for regulators to establish tough,effective standards.”

The centerpiece of the new regulations,the so-called Volcker Rule,forbids banks from making bets with their own money,and a final version is expected to be issued by federal officials in the coming months. With the financial crisis fading from view,banks have successfully pushed for some exceptions that critics say will allow them to simply make proprietary trades under a different name,in this case for the purposes of hedging and market-making.

The missteps by JPMorgan could highlight that murky line between proprietary trading and hedging. The bank unit responsible for losses takes positions to hedge activities in other parts of the bank.

“This is a crucial moment in the debate,” said Frank Partnoy,a professor of law and finance at the University of San Diego,who has been a longtime supporter of tighter rules for the nation’s banks. “It couldn’t have come at a worse time for JPMorgan Chase. After everything we went through in the financial crisis,the fact that something of this magnitude could happen shows that the reform didn’t do the job.”

On Wall Street,few have been more outspoken about the pitfalls of the Volcker Rule than JPMorgan’s chief executive,Jamie Dimon. Dimon not only attacked the rule,he personally criticized Paul Volcker,the former Federal Reserve chairman and the regulation’s namesake.

“Paul Volcker by his own admission has said he doesn’t understand capital markets,” Dimon told Fox Business earlier this year. “He has proven that to me.”

The industry reasons that the Volcker Rule would be a costly burden for the banks. But more important,industry officials say,it would hurt the markets and the broader economy.

“Regardless of how the final rule turns out,it will be a shock to the US financial system,as banking entities will need to take extraordinary measures to attempt to implement it,” said Barry Zubrow,JPMorgan’s executive VP of corporate and regulatory affairs,in a letter to federal regulators earlier this year. In the letter,Zubrow defended exactly this kind of trade.

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