In June 2010, Republican and Democratic House and Senate leaders wrapped up a 20-hour marathon session to approve a bill that would rewrite how our country regulated our nation’s financial system. The financial reform bill was created to prevent another financial crisis, like the one we just went through, from occurring again.
But despite the long hours, and the “empty Fritos bags and plastic Diet Coke bottles” that apparently fueled lawmakers during their closed-door meetings, Wall Street still came out winners in a bill that was was supposed to reform them: The Volcker Rules, named after former Federal Reserve Chairman Paul Volcker, which were supposed to place limits on the freewheeling trading and risks taken by banks, were watered down. The rules originally were supposed to prevent banks from using their own taxpayer-backed cash to make risky bets in the financial markets. According to the Washington Post, Sen. Scott Brown, the Republican from Massachusetts, pushed to “allow banks to invest at least a small amount of capital hedge funds and private-equity investments.” It was that provision that helped the bill get some of the key votes it needed to pass.
Well, that provision also helped JPMorgan Chase’s $2 billion trading loss announced yesterday, and bank reformers want the Volcker Rules to be strengthened.
Marketplace’s Heidi Moore explains it concisely: “On Wall Street there’s a saying: There’s never just one cockroach in the kitchen. So if JPMorgan—the alleged smartest guys in the room—could take a bet this big, this stupid, and lose it then what are other banks also up to? It shows us that we’ve learned nothing and that the mindset of Wall Street hasn’t changed, that risk is out there and we’re not measuring it well.”
JPMorgan Chase’s chief executive Jamie Dimon told analysts in a conference call: “Just because we’re stupid doesn’t mean everybody else was.”
Reuters’ Felix Salmon sums it up: “JP Morgan more or less invented risk management. If they can’t do it, no bank can. And no sensible regulator can ever trust the banks to self-regulate.”
[Update: Required Reading! “JP Morgan’s Loss: The Explainer”, by Heidi Moore ]