CQ TODAY ONLINE NEWS
May 16, 2012 – 11:17 p.m.
Morgan Loss Slows House Attack on Dodd-Frank
By Ben Weyl, CQ Staff
The ripple impact of the $2 billion trading loss at J.P. Morgan Chase & Co. is starting to hit Congress.
House Republicans have halted, at least for now, their assault on the Dodd-Frank financial regulatory overhaul. Senate Democrats, meanwhile, are seizing on the headlines to bolster their case for confirmation of top financial regulatory nominees who have remained stalled in the chamber. And the debate over implementation of the 2010 law has been thrown into sharp relief, with regulators under new pressure to finalize strict rules that might have prevented the blowup.
The most visible result so far is to come with votes Thursday on nominations to the Federal Reserve Board.
President Obama’s nominees, Jerome H. Powell and Jeremy C. Stein, have languished for weeks over the objections of Sen.
In comments to reporters, Reid directly tied the J.P. Morgan trades to the need to confirm the Fed nominees and finalize the rule barring proprietary trading by banks.
“They were betting like you would do at the craps table in Las Vegas, and they bet the wrong way,” said the Nevada Democrat. “The Fed, who’s responsible for drawing up those rules, they should have been done a long time ago.”
House Action Braking
J.P. Morgan’s loss also is creating a braking effect in the House, where the GOP has sought to dismantle the law (PL 111-203), which was enacted in the wake of the 2008 financial industry meltdown. The House Agriculture Committee was set to continue those efforts Thursday with a markup of legislation to roll back derivatives regulation. But lawmakers did not want to be seen as watering down regulations against the backdrop of J.P. Morgan’s news, and the markup was abruptly postponed.
In fact, at least one bill scheduled for a vote may have directly affected the bank’s actions. The measure (
J.P. Morgan’s costly derivatives trades were made by its London office.
The Himes bill had strong GOP support and modest backing from Democrats. Some critics, including Rep.
Democratic leaders in the Senate have so far shown no inclination to take up legislation to change Dodd-Frank, and their appetite to do so now appears even lower. Instead, they moved this week to bolster regulatory efforts by filling the vacancies at the Fed.
Morgan Loss Slows House Attack on Dodd-Frank
The Fed is one of the lead agencies implementing the regulatory overhaul, including a new ban on proprietary trading by banks, often called the Volcker rule, which might have prohibited J.P. Morgan’s ill-fated trades.
Named for former Federal Reserve Chairman Paul A. Volcker, who proposed it, the rule is supposed to take effect in July. However, regulators have struggled to finalize the complex restrictions and appear unlikely to do so before the statutory deadline. Democrats have blamed the slow pace, in part, on the sluggish speed in filling key regulatory positions.
The House Financial Services and the Senate Banking, Housing and Urban Affairs committees have both announced plans to investigate J.P. Morgan’s trades in the coming weeks, and top federal regulators are sure to be on the hot seat.
“There’s no doubt that this week’s news of J.P. Morgan’s trading losses has raised significant questions about the supervision of risk within an institution,” Rep.
Also up for debate is whether the Volcker rule as proposed by regulators would have prevented J.P. Morgan from making the trades. But it is unclear if regulators will now change course even if Democrats argue the rule should be toughened.
The law bars federally insured depository institutions from seeking to profit by trading in securities with their own money. If the bank is backed by taxpayer dollars, Volcker rule supporters argue, it should not be making such risky trades.
Hedging on Volcker Rule
Some exemptions were included. For example, banks can 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.
Earlier this week, Sen.
Until now, the banking industry appeared to be largely winning its argument that the Volcker rule needed to be flexible. Although that case likely has lost some momentum, analysts are not certain regulators are ready to change course.
“The predictable reaction was that the J.P. Morgan news would lead to tougher enforcement of the Volcker rules by the regulators. That may be the case, but reports of J.P. Morgan’s trade are not conclusive, in our view, as to whether the trade would have been permitted under Volcker or not,” Brian Gardner, a banking industry analyst with Keefe Bruyette & Woods, wrote in a research note.
“This underscores the difficulty in interpreting the Volcker rules and leaves it unclear how much tougher regulators will be enforcing Volcker compared [with] how they would have enforced the rules absent the J.P. Morgan announcement.”