After JPMorgan loss, a call for stricter oversight

JPMorgan’s trades show that the derivatives market remains too opaque for regulators to oversee effectively, said Rep. Barney Frank, D-Mass., one of the law’s namesakes.

“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,’” he said.

Criticism of the bank did not stop with its traditional chorus of detractors. It also came from Sen. Bob Corker, R-Tenn., a prominent member of the Senate Banking Committee who has received $10,000 since January 2011 from JPMorgan’s political action committee, the most any candidate has received.

Corker, a leader of a failed effort last year to block a Federal Reserve rule that slashed bank profits from debit cards, called for a hearing “as expeditiously as possible” into the events surrounding JPMorgan’s loss.

Tim Ryan, president of the Securities Industry and Financial Markets Association, a trade group, said it was impossible to legislate or regulate risk out of the financial system.

“My hope is that this is viewed as bona fide hedging, but it went wrong,” he said in an interview. “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.”

No one seemed to suggest Friday that JPMorgan had broken a law. But the mistake added a wrinkle to the still-unsettled discussion about how the financial industry should be regulated in the aftermath of 2008.

“This just tells you that we are a long, long way from getting our arms around this whole ‘too big to fail’ issue,” said Cliff Rossi, a former top risk executive for Citigroup, Countrywide and other big financial companies.

Immediately after the crisis, a time of popular outrage over bailouts and investment losses, there was broad public support for an overhaul of bank regulations.

The changes promoted by the Obama administration were in many cases similar to what the financial industry had sought before the crisis: Consolidation of regulators and oversight of the multi-trillion-dollar marketplace for derivatives.

Regulators are still drafting hundreds of rules under the 2010 law. As Wall Street has returned to record profits, and executives to million-dollar bonuses, banks have fought to soften those rules.

In particular, the industry has fought hard against a few provisions that might have prevented the problems at JPMorgan.

One is the so-called Volcker rule, which will prohibit banks from trading for their own profit. The rule is still being written, and the Federal Reserve has said it will begin enforcement in 2014.

JPMorgan said that its bets were made only to hedge against financial risk. Dimon conceded that the strategy was “egregious” and poorly monitored. But analysts, former bank executives and many lawmakers disagreed.

“This is an exact description of proprietary trading-style activity,” Sen. Jeff Merkley, D-Ore., told reporters Friday. “This really is a textbook illustration of why we need a strong Volcker rule firewall.”

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