Calls for tougher regulation follow JPMorgan $2 billion derivatives loss
JPMorgan Chase’s stunning $2 billion derivatives trading loss brought new calls Friday for tougher regulation of banks, with lawmakers blasting JPMorgan’s chief executive Jamie Dimon for fighting tighter rules.
A day after the top US bank revealed the losses on trading its own financial portfolio, powerful Senate veteran Carl Levin linked it to the behavior that sparked the US financial collapse in 2008, sending the country deeper into recession.
“JPMorgan’s loss is a stark warning about the dangers of having major banks take risky bets,” he said.
“We were forced not too long ago to bail out banks which had made these kind of risky bets. We never want to do that again.”
Levin blamed poor implementation of the post-crash reforms meant to reduce the risks of one bank sparking a major meltdown — the Dodd-Frank Wall Street reforms.
A key part of Dodd-Frank is the Volcker rule, which aims at banning banks from trading their financial assets as a part of their usual business — the so-called proprietary trade.
But US banks, led by Dimon himself, have strongly fought the rules. The result, according to Levin, is that the regulators have left a “massive loophole” that permits just the kind of activity that caused JPMorgan’s loss.
That loophole allows banks to engage in “portfolio hedging” — taking out broad bets in all kinds of areas aimed at mitigating possible losses elsewhere.
Levin says the law limits banks to only hedging specific assets.
“Hedging is allowed, but this kind of portfolio hedging, or hedging on the direction of the economy, is not allowed,” he told journalists Friday.
“When those kinds of bets are lost, we all pay the price. We pay the price when banks need to be bailed out because they are too big to fail.”
The banks argue the rules are unnecessary, that they can police themselves and that implementing them will cost them a lot.
But another legislator, Barney Frank, rebuffed that Friday.
“JPMorgan Chase, entirely without any help from the government, has lost in this one set of transactions, five times the amount they claim financial regulation is costing them.”
Economist John Makin of the conservative American Enterprise Institute — no friend to government regulation — said tighter rules for banks were necessary.
“Depository institutions that enjoy protection afforded by deposit insurance and their absolute large size — too big to fail — should not be allowed to engage in proprietary trading. Time to implement the Volcker rule.”
But the Federal Reserve, the main regulator, is also caught between making the banks safer at this point — forcing higher capital reserves and reining in often highly profitable proprietary trade — and keeping controls looser so as not to already sluggish economic growth.
“The Fed faces a difficult choice,” said Makin.
“Over the longer term, the Fed will want to put bankers on a shorter tether, that limits proprietary trading.”
But some analysts said that the JPMorgan case shows that banks are so large now no one can manage the risks.
“When you have the supposedly best-managed bank of the country making a mistake of this magnitude raises the question if anybody is able to manage a bank of this size,” said Rochdale Securities banking analyst Dick Bove.
“The regulatory pressure to break up the banks will increase”
“The lessons from JP Morgan’s losses are simple. Such banks have become too large and complex for management to control what is going on,” said Simon Johnson, professor at MIT and a former IMF chief economist.
AFP Photo/Alex Wong