In Washington, Mixed Messages Over Tighter Rules for Wall St.
Conflicting signs are emerging in Washington over whether JPMorgan Chase’s surprise trading loss will spur tighter regulation on Wall Street.
One of the banking industry’s main regulators appeared to indicate that it would oppose new efforts to rein in risky Wall Street activities, while other regulators emphasized caution. Still, a Congressional committee announced plans on Monday to hold a hearing on the financial regulatory overhaul that will look at the JPMorgan loss.
Wall Street’s representatives, fearing that the entire banking industry might pay for JPMorgan’s sins, are trying to contain the fallout in Washington, people close to the matter said.
When JPMorgan announced on Thursday that it had a trading loss of $2 billion that was expected to grow, some lawmakers and consumer advocates cast it as a case study on the need for stricter Wall Street oversight. The central policy, known as the Volcker Rule , would ban banks from trading with their own money, an effort to prevent bank blowups that necessitate bailouts with taxpayer money.
Yet calls for a crackdown, which come as regulators are putting the finishing touches on the Volcker Rule and other such overhauls, may not find many sympathetic ears in Washington.
The nation’s main banking regulator, the Office of the Comptroller of the Currency, in recent days told a prominent Republican lawmaker that the Volcker Rule would not have outlawed the disastrous trade. The regulator also opined to the lawmaker, Senator Bob Corker of Tennessee, that it hoped the final version of the rule would not interfere with this sort of trading.
“They were adamant that hedges like these are there to make the bank safer,” Mr. Corker said in an interview. The conversation occurred between Mr. Corker’s staff and the “examiner in charge” of overseeing JPMorgan.
JPMorgan said it initially used the position to hedge its exposure to the broader economy — and in theory hedging is exempt under the rule. It is unclear, whether banks under the Dodd-Frankfinancial overhaul law are allowed to hedge only against specific risks rather than theoretical concerns.
In response to Mr. Corker’s statements — and the firestorm they created among lawmakers on Monday — Bryan Hubbard, a spokesman for the comptroller, clarified that the conversations with Mr. Corker “were based on incomplete details.”
“It is premature to conclude whether the Volcker Rule in the Dodd-Frank Act would have prohibited these trades,” Mr. Hubbard said, noting that the Volcker Rule was “not in effect yet.” Regulators plan to complete the overhaul later this year.
Still, other regulators echoed the agency’s cautious tone on Monday, saying that it was too soon to tell whether the Volcker Rule would need some tweaking.
An official at one bank regulator said that the agencies drafting the rules did not provide for more exemptions than lawmakers had intended.
The official, who spoke on the condition of anonymity because regulatory discussions are not public, said the language in the proposed rule closely tracked the language of the Dodd-Frank statute, which allows banks to take steps to protect themselves against losses on an “aggregated position,” or portfolios of securities. That, the official said, means banks are permitted to place broad hedges on portfolios, rather than having to match each hedge with an individual security or investment.
A spokesman for the Federal Reserve said that regulators were still gathering facts about the trading losses at JPMorgan. The central bank also said it was examining whether there were similar risk problems in other corners of JPMorgan.
Mr. Corker was hesitant to judge whether the Volcker Rule would have prevented JPMorgan’s trades. “I don’t know,” he said. Instead, Mr. Corker called for a Congressional hearing to shed light on the intricacies of the positions and the implications for the Volcker rule.
His requests were heeded. The Senate Banking Committee announced plans on Monday to hold hearings in the coming weeks into Wall Street regulation, in which the JPMorgan debacle is “expected to be discussed,” the committee said.
JPMorgan, however, is stepping away from another public panel on the Volcker Rule. The Commodity Futures Trading Commission, one of the regulators writing the Volcker Rule, will host a public roundtable this month about the new regulation and has invited JPMorgan to speak. Last week, JPMorgan suggested that one of its top Volcker Rule experts would attend. But then the bank said that this person had a scheduling conflict. Rather than dispatch another executive to Washington, the banks recommended an employee at another bank.
A JPMorgan spokeswoman said the cancellation was unrelated to the trading loss.
Another JPMorgan official said that while the bank disagreed with some portions of the Volcker Rule, it did feel that, in their final form, the trades that caused the bank $2 billion in losses would not have been allowed under the Volcker Rule as it was intended.
While the bank said it believed that the trade started as a basic, allowable hedge under the proposed Volcker rule, “it morphed into something we should not be doing,” the official said. “We don’t think where it ended up would be consistent with the Volcker Rule or our standards.”
Other Wall Street companies, rather than reveling in the embarrassment of a competitor who emerged from the financial crisis relatively unscathed, are moving to play down the incident. Several Wall Street lobbyists interviewed for this story, who all spoke on the condition of anonymity, said the trading blowup could not have come at a worse time as regulators put the finishing touches on their rule making.
“There is absolutely no Schadenfreude,” said one lobbyist from a rival bank. “This is not a gift.”