How Jamie Dimon Whiffed on the Volcker Rule

If the Jamie Dimon hearing was ever going to be more than just political theater, it would have answered at least one essential question: Would the Volcker rule have prevented the so-called hedges that led to $2 billion in losses at JPMorgan?

President and CEO of JPMorgan Chase Co. Jamie Dimon (L) arrives to testify before a Senate Banking Committee hearing on Capitol Hill June 13, 2012 in Washington, DC.
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President and CEO of JPMorgan Chase Co. Jamie Dimon (L) arrives to testify before a Senate Banking Committee hearing on Capitol Hill June 13, 2012 in Washington, DC.

Instead, and incredibly, Dimon contended twice that he didn’t know what the Volcker rule says. “I don’t know what the Volcker Rule is, it hasn’t been written yet,” the regaled banking chief told senators today.

Note to Mr. Dimon and his handlers: The proposed rule, mandated by the Dodd-Frank legislation, was published in November in the Federal Register and opened for public comment. Financial regulators are now in the process of finalizing it. That, after all, is why there’s a discussion. If the trade and the losses inform the rule, there’s still time to change it.

At least somewhat contradictorily, the chief of JPMorgan had earlier said it wasn’t clear that the rule would have prevented the trade. A little later he said, “It may very well have stopped parts of what this portfolio morphed into.” Which is it? Does he not know what’s been in the proposed rule that’s been available for seven months, or does he know enough about the rule to say it would not have prevented the trade?

Fortunately for Dimon, the senators didn’t seem to know much more than he did. Had they taken the time to read the rule, they would have known that the proposed rule requires a series of compliance steps that would appear to have had a profound effect on the errant trades.

The proposed Volcker rule does allow for hedging of bank holdings, so-called macro-hedging. But it generally prohibits a hedge that “creates significant new risk exposure.” (Read more about the Volcker Rule).

To Dimon’s own statements that the trades were poorly vetted and supervised, the Volcker rule has a six-step process for ensuring that a hedge is allowed. It requires any bank that engages in hedging “to develop and implement a program” that ensures compliance with the rule. A written plan is required, monitoring is required, training is required.

On the issue of rogue traders or a rogue unit, the rule says: “A banking entity’s compliance regime must include written hedging policies at the trading unit level and clearly articulated trader mandates for each trader to ensure that the decision of when and how to put on a hedge is consistent with such policies and mandates.”

In short, even a cursory reading of the rule suggests JPMorgan would have been required to do many of the things that Dimon says were not done when it came to the big hedges.

It is intensely complicated. And there remains a debate about whether the traders would be considered hedges at all. Dimon speaks of the trades morphing and appears to mean from a hedge to a proprietary trade.

But what was the hearing for if not to figure out the best regulatory policy? Dimon should have come prepared to do battle over meaningful policy. If he was indeed unprepared, senators should have made it their business to point that out.

It was a missed opportunity.