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JPMorgan $2 Billion Loss and the Volcker Rule

JPMorgan $2 Billion Loss and the Volcker Rule

If you haven’t already heard, JPMorgan Chase is facing a financial firing squad after admitting to a catastrophic – and completely unexpected – $2 billion loss last week. It claims it was a “well-intentioned”, though “sloppy” financial risk.

And that’s just the tip of the iceberg. Monday morning is sure to be one for the history books when the markets open and the loss is suddenly and forcefully felt.

Now, all eyes are on the Volcker Rule and are asking the tough questions, including why the many delays in the overhauling the American financial sector. Others are asking – and demanding to know – what the consequences will be for the controversial CEO of Chase, Jamie Dimon.

He continues to insist this was noting more than a backfired “hedging strategy” versus a too-risky bet with the bank’s money, hence the connection by some to the Volcker Rule.

The Volcker Rule

The Volcker rule, introduced as part of the Dodd-Frank law following the 2008 economic crash, was intended to ensure banks don’t become their own customers. The goal was to protect individuals via a more transparent foundation. This would make it easier for proper oversight within the financial sector. It’s named after former Federal Reserve Chairman Paul Volcker.

Another important aspect of the Volcker Rule is its specific guidelines that financial bodies are not allowed to simultaneously serve as an advisor and creditor with clients. It was designed to keep conflicts to a minimum while ensuring the legalities and ethical dynamics.

Many may recall that JPMorgan was the sole entity that remained profitable during the early downturns. Of course, this fueled Dimon’s demands that stricter regulation be left to the wayside. He used his own bank’s success as proof that closer regulation was a waste of time. He said on Friday that he couldn’t be certain that JPMorgan hadn’t broken any laws or regulatory rules, though insisted his bank was “totally open” to auditors and regulators.

Jamie Dimon

Dimon certainly has his fair share of those who feel he’s arrogant and narcissistic; still others refer to him as a brilliant genius. There’s no denying, however, he’s made considerable controversial statements during his impressive career.

In early 2012, Dimon gave an interview to Fox Business Network. Before he was finished, he stated that Paul Volcker does not have an idea as to how capital markets operate. If he did, according to Dimon, there would be no wasted time on the Volcker Rules. In yet another interview, he put Ben Bernanke in his line of fire and wondered if he had even bothered to study the real reasons behind the economic crash and recovery,

Has anyone bothered to study the cumulative effect of all these things?

In one more interview held earlier this year, Dimon quipped,

Acting like everyone who’s been successful is bad and that everyone who is rich is bad — I just don’t get it.

The Politicians Input

Over the weekend, several politicians stepped into the arena. Fox News reported one democratic senator insists it was a high risk gamble and one that never should have happened. “This is not a hedge,” said Sen. Carl Levin, (D-Mich.). Levin is the lead in the subcommittee that initially led investigation. He went so far to call it a “major bet” and that it’s now compromised efforts of many looking to keep the economy moving forward.

Simon Johnson insists this is proof that JPMorgan Chase does not have what it takes when comes to “managing risk”. The former International Monetary Fund chief economist also said, “…if JPMorgan can’t, no one can”.

The SEC is refusing to comment.

The Aftermath

On Friday, JPMorgan stock lost considerable value on the stock market to the tune of around $15 billion of its market value. By the time the closing bell rang, it was down more than 9%. Even worse was the announcement that S&P issued a “negative outlook” for the bank, almost guaranteeing a downgrade in its credit rating; meanwhile, Fitch Ratings downgraded the Chase rating one notch.

So will this mean efforts to speed up the implementation of enhanced oversight that should have been in place two years ago? Maybe. One of the authors of the law, Rep. Barney Frank (D-Mass) hopes it will and said, “JPMorgan’s trades show that the derivatives market remains too opaque for regulators to oversee effectively.” He then went on to say,

When a supposedly responsible, well-run organization could make such an enormous mistake with derivatives, that really blows up the argument, ‘Oh, leave us alone, we don’t need you to regulate us’.

There are those staunchly supporting the bank, including Tim Ryan, who is the president of Securities and Financial Markets Association, described as a small trade group, said on Sunday,

My hope is that this is viewed as bona fide hedging, but it went wrong… a mistake was made. Money is going to be lost. It’s not customer money. It’s not government money. It’s JPMorgan’s money, the shareholders of JPMorgan.

One thing’s for sure: Monday’s going to be a tough one for Jamie Dimon and his ego.

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