First Update (
May 14, 2012):
LONDON/NEW YORK (Reuters) - JPMorgan Chase & Co Chief Investment Officer Ina Drew retired on Monday, the first casualty after the bank suffered trading losses that could reach $3 billion or more and that have tarnished the reputation of high-profile Chief Executive Jamie Dimon.
SWAG Says: While this story is still unfolding, it does not diminish the idea about the need for full implementation of the
Dodd-Frank Act (Senate summary) and especially
the so-called "Volker rule" and with no loopholes. A loophole big enough to drive a semi-truck through allowed this to happen by all accounts.
However, the GOP and their side (e.g., the Chamber of Commerce and a few others) keep resisting any change and/or full implementation of Wall Street that could stop this crap, all the while the crap continues saying any rules will hamper "the job creators." Um... how many jobs could be started with that $2 billion one ponders? (More on this follows).
The following is my composite from several sources,
including TPM and
the NYTimes. Any editing therein is my responsibility - it's long, but needs to be posted for historical reasons, if nothing else.
Mitt Romney
will probably have a harder time defending his intent to repeal the 2010 Dodd-Frank Wall Street reform law in the wake of recent JP Morgan’s stunning disclosure that it lost at least $2 billion betting on the economy. That loss also raises important substantive questions about the effectiveness of the new financial reforms themselves, particularly the one provision specifically intended to end just this sort of trading.
Sen. Carl Levin (D-MI) and Sen. Jeff Merkley (D-OR) criticized regulators (see below) for writing a major loophole into the so-called Volcker Rule —
which was meant to prevent banks from betting with depositor funds — at the behest of financial interests. That kind of major loophole goes against the intent of the reforms Congress passed under Dodd-Frank, said Levin. Dodd-Frank was designed to restrict banks from gambling with customer funds under the guise of “hedging,” while still allowing banks to make proprietary trades as hedges against specific investments.
That law tasked Obama administration regulators with writing the restrictions. Those regulations would allow banks to hedge against broad losses by placing bets, such as JP Morgan’s, on things like economic growth and inflation.
Impact:1. This exception will allow banks to hide a vast amount of proprietary trading.
2. The draft rules at this point are way too lax.
3. They do not have the bright lines that are needed.
4. Both senators identified this loophole and similar loopholes in early versions of the rule months ago.
5. That is exactly what happened at JP Morgan recently and is one the reason why the company’s CEO, Jamie Dimon, claimed on the Sunday TV shows that the losing bets wouldn’t have run afoul of the Volcker Rule if it had been operational.
6. The rule is intended to take effect in July, though Wall Street execs, including Dimon, have been pushing hard to delay implementation.
7. Merkley and Levin, along with outside reform advocates are seizing on the episode to strengthen the rule and bring greater scrutiny to Wall Street.
8. The so-called “too-big-to-fail banks like JP Morgan, with trillions in assets and trillions more in high-risk investments and trading,” require regulation and transparency.
Who are the Regulators and What is the Volker Loophole? Regulators have faced a barrage of complaints from lawmakers and financial industry lobbyists in their 14-month-long quest to constrain risky trading on Wall Street, an effort known as the Volcker Rule. Now, as regulators begin a push to produce a final draft of the rule, they face hurdles from an unexpected group: themselves.
For example:1. The Federal Deposit Insurance Corporation pushed for tough language that would require bank executives to vouch for their compliance with the Volcker Rule.
2. The Office of the Comptroller of the Currency has been fiercely resisting, say people close to the regulators.
3. Some regulators even quarreled over which agency would vote first on the rule, according to one of the people close to the regulators.
4. Four regulators ultimately did vote; a fifth agency (the Commodity Futures Trading Commission) was conspicuous by its silence.
5. The Chamber of Commerce opposes the Volcker Rule has said, “We see a split. They might be trying to get to the same place, but it’s difficult to get there.”
6. The Volcker Rule bickering reflects broader tensions among financial regulators, who have amassed broad and sometimes overlapping powers in the aftermath of the financial crisis. The Dodd-Frank Act of 2010, the sprawling overhaul that spawned the Volcker Rule among 300 other regulations, transformed the regulatory landscape and is at the heart of the squabbling.
7. The rule would limit most proprietary trading, where a bank places bets for itself rather than for clients, a major money maker for the industry.
8. Wall Street has warned that the rule will eat into profits just as banks are trying to regain their footing.
Regulators have already fashioned multiple exemptions to the ban:
1. Allowing banks to place trades when hedging against risk.
2. Banks can also buy securities from one client with an eye toward later selling them to another, though the line is often fuzzy between that business and proprietary betting.
The proposal reflects the rule’s complexity, spanning nearly 300 pages and taking aim at some of the most arcane financial minutia. Davis Polk, a law firm that advises some of the nation’s biggest banks, has churned out multiple summaries of
the proposal for clients and even started a Web site.
In recent weeks, the deepest divide centered on provisions that spelled out how regulators would enforce the Volcker Rule. One idea would require bank executives to promise compliance. In August, a confidential draft proposal included the “CEO attestation” clause in brackets, meaning it was “included for discussion purposes only, pending resolution at the principal level.” The Office of the Comptroller of the Currency objected, according to the people close to the regulators, who spoke on the condition of anonymity because the discussions were private.
The agency, which oversees national banks, flagged the executive compliance rule as a deal-breaker. Over the last month, regulators scrambled to draft a compromise. The agencies formed Volcker Rule working groups, which held weekly phone calls and regularly gathered in a conference room at the FDIC’s Washington headquarters, the people said. Treasury Department lawyers occasionally mediated the dispute. But in recent days only one compromise emerged: turn the CEO rule into a question. Ultimately, regulators asked whether the rule would “be a preferable approach.”
The Office of the Comptroller of the Currency, with support from the Federal Reserve, also opposed an FDIC proposal that would force banks to turn over a battery of trading data to independent warehouses where regulators could keep an eye on the trades. Again, the provision was demoted to a question.
Regulators are playing down their differences:
1. Elise Walter, a Democratic commissioner at the Securities and Exchange Commission, said at a public meeting last week that the Volcker Rule had “been a very effective exercise in cooperation.”
2. At the same meeting, however, the agency’s lone Republican commissioner, Troy Paredes, voted to approve the rule but warned that he had “significant reservations.”
3. At the Federal Reserve, which quietly voted by e-mail recently, one board member, Sarah Bloom Raskin, opposed the proposal, according to a person with knowledge of the vote. It is unclear why she voted against the rule.
4. The Fed and the FDIC declined to comment.
5. The agency is concerned that Wall Street will mount lawsuits against its policies, especially in light of a court decision over the summer that struck down a separate SEC rule. The latest draft of the Volcker Rule does outline the economic effects of the proposal.
6. The CFTC, smallest of the regulators, also says it feels it cannot currently spare the time and staff needed to review the Volcker Rule while it juggles dozens of other Dodd-Frank policies. It is unclear whether the agency will adopt a similar version of the rule.
7. Wall Street groups have already seized on what they see as a split among the agencies.
For example: The Chamber of Commerce sent a letter last week outlining its concerns Treasury Secretary Geithner, saying the rule had a lack of coordination and injects additional uncertainty into an already fragile economy, and threatens to further endanger the economic recovery.
For those who resist any rules, think hard about this latest massive banking loss.