For Volcker Rule, JPMorgan’s $2 Billion Loss Says It All

It’s never polite to say I told you so, but JPMorgan Chase & Co.’s $2 billion trading loss has proponents of a tougher proprietary trading ban saying . . . well, you know what.

JPMorgan’s admission is a shocker. The bank said the losses resulted from errors, sloppiness and bad judgment, which top bank executives didn’t know about or understand until it was too late. On Wall Street and around the globe, JPMorgan was a standard-setter for risk management. If regulators can’t trust JPMorgan to get it right, whom can they trust?

The Volcker rule, part of the Dodd-Frank financial reform law, was inspired by former Federal Reserve Chairman Paul Volcker. It’s supposed to stop federally insured banks from making speculative bets for their own profit -- leaving taxpayers to bail them out when things go wrong.

As we have said, banks have both explicit and implicit federal guarantees, so the market doesn’t impose the same discipline on them as, say, hedge funds. For this reason, the Volcker rule should be as airtight as possible.

The huge trading positions taken by the London branch of JPMorgan’s chief investment office certainly drive home the point. As first reported by Bloomberg News, the investment office, operating much like a hedge fund, built a position that may have totaled $100 billion in a credit-derivative index known as the CDX, which tracks the default risk of a basket of companies. Those are the positions that blew up. They could ultimately cost the bank much more than $2 billion now that the market knows they are being unwound.

Skewed Prices

read more: http://www.bloomberg.com/news/2012-05-11/for-volcker-rule-jpmorgan-s-2-billion-loss-says-it-all.html