Saturday, May 12, 2012

U.S. Senate Hearing May Test Volcker Rule Concepts

In a letter to Senate Banking Committee Chairman Tim Johnson (D-SD), Senator Bob Corker (R-TN), a key member of the Committee, has called for immediate investigation into the details of the JPMorgan Chase & Co. trading losses. Senator Corker wants the committee to examine if the trades in question were bona fide hedging transactions or poorly managed proprietary trades, and wants to explore whether US taxpayers are fully protected from losses at major financial institutions. In addition, Senators Levin (D-MI) and Merkley (D-OR), authors of the Dodd-Frank Act's Volker Rule, have issued statements urging rapid adoption of Volker Rule regulations prohibiting hedge fund investments by large financial institutions being disguised as risk mitigation or market making.

Senator Corker has called for immediate hearings on the JP Morgan losses to explore questions that many will see as key to the practical implementation of the Volcker Rule:

  1. Are we confident that taxpayers are fully protected from losses at major financial institutions?
  2. Were these [JP Morgan transactions] bona fide hedging transactions, or were these poorly managed proprietary trades? And what, precisely, is the distinction?
Senator Levin issued a statement calling the JP Morgan losses more evidence for the need for Volcker Rule regulations.

The enormous loss JP Morgan announced today is just the latest evidence that what banks call 'hedges' are often risky bets that so-called 'too big to fail' banks have no business making. Today’s announcement is a stark reminder of the need for regulators to establish tough, effective standards to implement the Merkley-Levin language to protect taxpayers from having to cover such high-risk bets.

Senator Merkley issued a sharply worded statement highly critical of JP Morgan, and calling the losses precisely the kind of thing the Volker Rule firewall is intended to prevent. 

What yesterday’s announcement makes abundantly clear is that even J.P. Morgan, supposedly the best risk manager on Wall Street, can make bets that go spectacularly wrong. This is exactly why the banks that our businesses and families depend for loans should not be in the hedge fund business.

Moreover, it is essential that bank regulators issue rules that do not permit hedge fund investments by Wall Street banks to be disguised as ‘market making’ or ‘risk mitigation,’ as this case so dramatically demonstrates.

I ask, once again, that regulators implement without delay a Volcker Rule as intended by Congress, with a clear, effective firewall between hedge fund-like trading and traditional banking.

American families and businesses should not be subsidizing these types of risks or victimized by these types of losses. We need a wholesale change of culture at our banks and at our regulatory agencies, which is precisely what the Volcker Rule firewall is intended to create.
Given JP Morgan's now shattered reputation as one of the best risk managers on Wall Street, the furor on the Hill about the staggering, and the election year climate, it is certain these Senate hearings will be full of fireworks.  This renewed focus on the Volker Rule will also likely light a fire under regulators to implement their Volker Rule regulations.