CQ TODAY ONLINE NEWS
Updated May 11, 2012 – 10:21 p.m.
Senators Seek Tougher Bank Rules
By Ben Weyl, CQ Staff
The announcement that J.P. Morgan Chase & Co. incurred $2 billion in trading losses is bringing new scrutiny from lawmakers to the stability of the financial system and the implementation of the Dodd-Frank regulatory overhaul law.
To Democrats, the bank’s losses underscore the rationale for the overhaul they wrote in 2010. And they are using J.P. Morgan’s troubles to increase pressure on regulators for strict enforcement of the law’s Volcker rule, which seeks to ban proprietary trading by banks.
To some Republicans, who do not want to be caught flat-footed on a politically explosive issue, the losses justify additional oversight, even as GOP lawmakers oppose government intervention in the industry.
“The argument that financial institutions do not need the new rules to help them avoid the irresponsible actions that led to the crisis of 2008 is at least $2 billion harder to make today,” said Rep.
“Clearly, the losses posted by J.P. Morgan are significant, and as policymakers we should understand in detail what has transpired,” the Republican wrote in a letter to panel Chairman
Without specifically mentioning the Volcker rule, Corker proposed questions that he said needed answering: “Are we confident that taxpayers are fully protected from losses at major financial institutions?” he asked. “Were these bona fide hedging transactions, or were these poorly managed proprietary trades? And what, precisely, is the distinction?”
Those questions lie at the heart of the continuing debate over the Volcker rule, which was the subject of a bitter fight in Congress and which regulators are struggling to implement. Democrats say the proprietary trading ban is necessary to prevent future government bailouts of big financial companies. Republicans contend it will only harm financial markets.
Seeking Stiffer Regulation
The proprietary trading ban was named for former Federal Reserve Chairman Paul A. Volcker, who proposed it. The Dodd-Frank law bars federally insured depository institutions from seeking to profit by trading in securities with their own money and tightly circumscribes their investments in hedge funds and private equity firms.
In a May 11 conference call with reporters, the legislative authors of the Volcker rule, Democratic Sens.
“We really do need this boundary between traditional banking and the hedge fund-style investing,” Merkley said. “The draft rules at this point are way too lax. They do not have the bright lines that are needed.”
The law grants some exemptions from the trading ban, allowing banks to make trades designed to hedge certain risks. J.P. Morgan Chief Executive Jamie Dimon, a vocal critic of the Volcker rule, has said the trades involved in his bank’s losses were hedges that would have been permitted under the restrictions.
Senators Seek Tougher Bank Rules
Merkley and Levin said it appears the regulations as currently proposed might not have blocked such trades. They said regulators ignored congressional intent by making the regulations too loose.
The proposed regulations contain “a big enough loophole that a Mack truck could drive right through it,” said Levin.
The senators said they drafted the law to allow for tightly linked hedges, such as trades based on swings in interest rates or exchange rates. They did not intend to permit hedging trades to protect an entire portfolio of bank assets, such as the ones undertaken by J.P. Morgan that were based on the direction of the broader economy.
“The regulators are now hopefully going to implement the law as written,” said Levin. “This is about whether the law is going to be abided by, first by the regulators, then by Wall Street.”
Levin, who is chairman of the Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations, also said there is no need for additional legislation because regulators are fully empowered to proscribe these trades under Dodd-Frank. And he said it is too early to say whether he will investigate J.P. Morgan’s trading activities.
Johnson said the J.P. Morgan trading loss news demonstrated “why opponents of Wall Street reform must not be allowed to gut important protections for the financial system and taxpayers.”
But Johnson also found a silver lining of sorts. “Market reaction so far shows that the financial system and the bank itself are stronger today than in 2008, thanks to improvements adopted after the financial crisis,” he said.
The campaign of presumed Republican presidential nominee Mitt Romney also weighed in, saying the news demonstrated “the importance of oversight and transparency in the derivatives market.”
“J.P. Morgan’s investors, not taxpayers, will incur any losses from this hedging trade gone bad,” said Romney spokesman Andrea Saul. “As president, Gov. Romney will push for common-sense regulation that gives regulators tools to do their jobs, and that gives investors more clarity.”
Waiting for Regulations
The restrictions on bank proprietary trading are supposed to take effect in July, but regulators are struggling to reach a consensus on implementation. The proposed regulations left hundreds of questions unanswered, leading financial companies, which strongly oppose the trading ban, to argue it is too complex and would harm markets and the economy.
Lawmakers, who have far less say now that the issue is beyond the legislative process, have taken to using their political megaphones to sway regulators.
Senators Seek Tougher Bank Rules
At a Senate Banking subcommittee hearing last week featuring Volcker, senators on both sides of the aisle sought to steer the rule’s legendary namesake to their side.
In response to a question from Merkley, Volcker said he disagreed with industry warnings that the rule would dangerously impede market liquidity. “If the markets are too liquid, it can give rise to behavior that is not very useful in terms of the basic business of banking or financial markets generally,” Volcker said.
Under questioning, Volcker also dismissed claims that the rule would place U.S. financial institutions at a disadvantage to their international competitors.
Meanwhile, Corker said that some regulators appeared to be trying to eliminate market-making, an exempted activity under the law. And Volcker endorsed Corker’s point by saying he did not support doing away with market-making by banks. “Nonsense,” Volcker said.
But when Corker encouraged the former Fed chairman to sit down with regulators and lay that out, Volcker demurred. “Well, I don’t want to get involved in the detailed regulatory processes,” he said. “I’ve had enough of that in my lifetime.”
First posted May 11, 2012 3:12 p.m.