When he disclosed a stunning $2 billion trading loss at JPMorgan Chase last week, Jamie Dimon, the bank’s chief executive, insisted that the trades had not violated the Volcker Rule, a crucial part of the Dodd-Frank reform law that is supposed to bar banks from doing risky trading for their own account.
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This week, however, the story changed. On Monday, a JPMorgan official told The Times that the trades — which have since ballooned to at least $3 billion — started out as allowable, but had “morphed into something” that crossed the line. On Tuesday, at the bank’s annual shareholder meeting, Mr. Dimon echoed that statement, calling for rules to ensure that permitted trades don’t “morph into something different.”
It might sound as if Mr. Dimon, whose lobbyists have led the charge to undermine Dodd-Frank, is calling for more and better rules. If only. We still don’t know the details of JPMorgan’s disastrous bets. But the Volcker Rule was supposed to be clear: federally insured banks would not be allowed to make speculative bets with their own capital. The problem is that Mr. Dimon and other bankers have been fighting to make the regulations as loose and vague — and as prone to morphing — as possible.
And before JPMorgan’s losses were disclosed, the bankers were almost certain to get what they wanted. In October, regulators issued proposed rules that were weak and toothless, and the final version due this summer isn’t expected to be any better.
JPMorgan’s loss has rightly revived calls for a much tougher version of the Volcker Rule. But Mr. Dimon isn’t giving up. By saying now that the bank’s loser trades were not wholly in compliance, he is suggesting that with a few tweaks, the current proposal — the weak version he fought for — will be adequate. Nice try, but no.
Without a strong Volcker Rule, taxpayers — via deposit insurance and bailouts — will continue to be on the hook for risky trades that boost bankers’ pay when things go well but that can wreak havoc on the financial system and broader economy when they blow up.
Mr. Dimon and his lobbyists even persuaded regulators to include a loophole in the proposed Volcker regulations known as “portfolio hedging.” It would allow banks to continue to engage in vast and complex trading, ostensibly to hedge broad financial and economic risks facing the bank. The law permits banks to make offsetting trades tied to specific investments but the loophole could let banks do proprietary trading under the guise of hedging.
The banks will keep pushing the limits. An effective Volcker Rule must require that any hedge be strongly tied to the investments being hedged — and require bank officers to certify that hedges meet all regulations and have not been put in place to generate speculative gains. Violators must face stiff penalties. And because hedging is often done with derivatives, the Volcker Rule must be coupled with new transparency rules and stiff capital requirements for derivatives trades.
For anyone who forgot what happened during the financial meltdown, the JPMorgan debacle should leave no doubts about the need for tougher regulations. The banks cannot be allowed to keep to their risky business as usual. The country cannot afford it.
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