JP Morgan’s $2 Billion Trading Loss Shapes Financial Reform Regulation

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JP Morgan’s $2 Billion Trading Loss Shapes Financial Reform RegulationOver the past week, controversy spread throughout Washington as JP Morgan, the nation’s largest bank, disclosed it incurred a 2 billion dollar trading loss on derivatives similar to those at the heart of the financial collapse.1 The trading loss, which JP Morgan claims was intended to hedge other investments, came at a particularly inopportune time.In early 2010, Congress passed the Dodd-Frank financial regulation bill in order to tighten regulatory oversight on Wall Street. However, many aspects of the law have not yet taken effect as regulators work to flesh out the actual rules. JP Morgan’s trading loss brought the so-called “Volcker Rule”2 to the forefront, which prevents banks with federally insured deposits from making their own trades.At controversy is an exception to the rule, which would allow banks to make trades if they are intended as hedges against risk in other portions of their investment portfolio. JP Morgan argues the exception should be interpreted broadly, allowing banks to make trades acting as broad hedges against their general portfolio. Just over two months ago, Treasury records show Jamie Dimon, the head of JP Morgan, visiting Treasury Secretary Timothy Geithner in order to discuss the Volcker Rule.3Conversely, proponents of stricter financial regulation want to tailor the rule narrowly to specific trades which hedge against directly related risks in a banks’ portfolio. The trading loss provided further support to regulators’ contentions that banks cannot effectively self-regulate and stricter controls are needed. Elizabeth Warren, a champion of Wall Street regulation and candidate for the Massachusetts Senate, seized on the news, calling for even stricter regulation to prevent banks from “gambling away people’s life savings.”41 http://www.forbes.com/sites/afontevecchia/2012/05/14/jpmorgans-2b-tradin... http://www.whitehouse.gov/the-press-office/remarks-president-financial-r... http://www.treasury.gov/initiatives/wsr/Pages/dfa3_12.aspx4 http://elizabethwarren.com/wall-street-reform?sc=web_home_rotato

Over the past week, controversy spread throughout Washington as JP Morgan, the nation’s largest bank, disclosed it incurred a 2 billion dollar trading loss on derivatives similar to those at the heart of the financial collapse.1 The trading loss, which JP Morgan claims was intended to hedge other investments, came at a particularly inopportune time.

 

In early 2010, Congress passed the Dodd-Frank financial regulation bill in order to tighten regulatory oversight on Wall Street. However, many aspects of the law have not yet taken effect as regulators work to flesh out the actual rules. JP Morgan’s trading loss brought the so-called “Volcker Rule”2 to the forefront, which prevents banks with federally insured deposits from making their own trades.

 

At controversy is an exception to the rule, which would allow banks to make trades if they are intended as hedges against risk in other portions of their investment portfolio. JP Morgan argues the exception should be interpreted broadly, allowing banks to make trades acting as broad hedges against their general portfolio. Just over two months ago, Treasury records show Jamie Dimon, the head of JP Morgan, visiting Treasury Secretary Timothy Geithner in order to discuss the Volcker Rule.3

 

Conversely, proponents of stricter financial regulation want to tailor the rule narrowly to specific trades which hedge against directly related risks in a banks’ portfolio. The trading loss provided further support to regulators’ contentions that banks cannot effectively self-regulate and stricter controls are needed. Elizabeth Warren, a champion of Wall Street regulation and candidate for the Massachusetts Senate, seized on the news, calling for even stricter regulation to prevent banks from “gambling away people’s life savings.”4


1 http://www.forbes.com/sites/afontevecchia/2012/05/14/jpmorgans-2b-tradin...

2 http://www.whitehouse.gov/the-press-office/remarks-president-financial-r...

3 http://www.treasury.gov/initiatives/wsr/Pages/dfa3_12.aspx

4 http://elizabethwarren.com/wall-street-reform?sc=web_home_rotator