Here’s what you need to know about the controversial Volcker rule and the $2 billion or more dollars that JPMorgan Bank lost recently on a bad bet: the Volcker Rule and proposed regulations as now written may not have prevented the risky gamble and its potential impact on the rest of the industry.
That’s because the Republican-led House of Representatives has been successful in undermining the Dodd-Frank regulatory overhaul, of which the Volcker Rule is one part. During the past two years the Republican majority and a cartel of bank lobbyists have created loopholes and exemptions in the proposed law to make it virtually ineffective. That’s a shocking revelation in light of the fact that similar risky bets by our nation’s largest financial institutions created the near financial collapse of 2007 and sent the nation into its deepest recession in the past 75 years.
Amazingly, just two years after bailing the financial industry out from the edge of financial ruin, Republicans in the Senate and House have been arguing that too much regulation under the Dodd-Frank bill will stymie economic growth and is unnecessary.
It’s an argument straight from the mouths of lobbyists.
Specifically, the Volcker Rule’s intent is to ban banks from placing bets with their own money, a practice known as proprietary trading. The rule was proposed because banks enjoy government backing — like deposit insurance — and should not be able to profit in such risky trades; especially since the prospect of failure puts Americans’ assets at risk of default and require a government bailout.
As with most things in Washington and Wall Street it is, of course, not that simple. The debate is really over how the Volcker Rule defines what amounts to proprietary trading (betting one’s own funds and hedging against itself) and how that is distinguished from legitimate market-making, a practice in which banks hold securities with the intent of selling them to a customer. But those details are beyond the immediate policy concerns of Congress or the public.
What’s critical is that Americans send a loud message to Congress that they expect strict regulations on banks and other financial institutions to prevent risky ventures that could cripple the economy. One way to do that is to toss out all the loopholes and exemptions proposed in the Dodd-Frank bill, tighten up any loose ends and make sure the bill holds the CEOs of these financial institutions accountable for their failures.
In fact, the other shocking aspect of this story is that the JPMorgan CEO Jamie Dimon seemed nonplussed by his bank’s “reckless performance.” While admitting that it was shoddy work “poorly structured, poorly monitored,” and “poorly executed,” Dimon also maintained that such failure was no reason to have government regulations in place.
Easy to say when what you’ve done doesn’t affect your pocketbook. And face it, Dimon has a nest egg that will keep him living at the top of the world no matter how much JPMorgan loses under his watch. To Dimon and others in his position, this isn’t so much about adding to their personal fortunes (although that’s fun too), as it is a power trip. They argue for less regulation because they don’t want restraints on the games they play, games that make them fabulously rich when they do well and maybe kicked off the island with a fat payout if they perform badly. Arguing against stricter regulations has nothing to do with what’s in the national interest, as Republicans try to suggest.
A game changer would be to include tougher measures of corporate accountability in the Dodd-Frank bill. If the personal fortunes of the CEOs fell when they made such poorly considered bets (just as small business owners suffer when they make poor decisions), strict regulation would suddenly become the CEOs best friend.
Talk about enacting a culture change in an industry.