Volcker Rule authors say JPMorgan loss highlights loophole

By Jim Puzzanghera

May 11, 2012 12 AM PT

WASHINGTON -- The senators behind the Volcker Rule warned Friday that regulators implementing it have proposed a loophole that would have allowed JPMorgan Chase & Co.’s $2-billion trading loss.

“That loophole should be closed,” said Sen. Carl Levin (D-Mich.).

Levin and Sen. Jeff Merkley (D-Ore.) wrote the provision in the 2010 financial reform law designed to limit trading by depositary banks for their own accounts. The Federal Reserve and other agencies are drafting the specific regulations covering that proprietary trading.

The law was intended to prevent the type of broad, risky bets that led to JPMorgan’s huge loss, Levin and Merkley told reporters Friday.

But JPMorgan Chief Executive Jamie Dimon and other industry officials have lobbied regulators heavily to loosen the restrictions. Draft regulations would allow such bets because JPMorgan characterized it as a hedge, the senators said.

“JPMorgan’s loss is a stark warning about the dangers of having major banks take these risky bets,” Levin said. “This is not a hedge as we defined it in the law.”

The Volcker rule allows banks to hedge against losses, and Dimon said Thursday the trades that led to the $2 billion loss would not have violated proposed regulations.

But Levin and Merkley said the law clearly prohibits broad hedging to offset risks from a portfolio or the direction of the economy. Only hedges tied to specific assets are allowed, they said.

The senators wrote a lengthy letter to regulators in February warning that “banks could easily use portfolio-based hedging to mask proprietary trading.”

Regulators should heed the example from JPMorgan’s huge trading loss to close the loophole before finalizing the regulations in July, Levin and Merkley said.

“Wall Street is spending a fortune to try to water down the language of this law,” Levin said. “They’re trying to wriggle out from under it and it should not be permitted.”

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