JP Morgan CEO Jamie Dimon will go before shareholders at the bank’s annual meeting Tuesday having already offered mea culpas for his firm’s $2 billion hedging loss to financial analysts and on set of NBC‘s “Meet the Press.”
While it’s unclear whether he’ll be making a trip to Congress to atone for the loss, JP Morgan’s “terrible, egregious mistake” has generated pink slips at the highest levels of the venerable bank and put Wall Street reform and two of its most controversial provisions back on the front burner on Capitol Hill.
The Senate Banking Committee will have “additional hearings” in coming weeks to discuss topics including the loss at America’s largest bank, the committee’s chairman, Sen. Tim Johnson (D) of South Dakota, said in a statement Monday afternoon.
The committee hasn’t made a decision about whether to invite executives from JP Morgan, according to a Democratic aide.
And congressional concern is bipartisan. Sen. Bob Corker (R) of Tennessee, a member of the banking committee, sent a letter to Senator Johnson on Friday asking for hearings on the matter.
“I have been vocal in my belief that we need a vibrant capital market for debt and equity securities and about the need for balance in ensuring that we have a financial system that can meet the needs of a 21st century economy,” Mr. Corker wrote. “That said, clearly the losses posted by JP Morgan are significant, and as policy makers we should understand in detail what has transpired.”
Corker raised two questions in his letter. First up: “Are we confident,” Corker asks, “that taxpayers are fully protected from losses at major financial institutions?”
The concern is a key one for Congress in light of the Dodd-Frank financial reform package, passed in 2010. Ever since, it has been the object of furious lobbying from financial institutions hoping to soften or simply stall some of its key provisions.
Democrats contend that the soul of the law is its attempt to avoid taxpayer bailouts similar to those handed out during the 2008 financial crisis.
JP Morgan’s loss is “strong evidence that having these rules of the road in place are essential to making sure that taxpayers don’t get left holding the bag and that poor decisions on Wall Street don’t undermine our financial system in the way that happened in 2008,” said Jay Carney, White House spokesman, during a gaggle with reporters aboard Air Force One Monday. “We have to remain ever vigilant.”
Key to that vigilance is a Dodd-Frank stipulation giving the Federal Deposit Insurance Corporation authority to wind down failed banks.
Democrats argue that the estimated $22 billion cost of implementing this provision over the next decade would be more than recouped by avoiding the type of taxpayer-funded bailouts necessary during the financial crisis.
Republicans say the mere existence of the fund legitimizes too-big-to-fail institutions by providing for their eventual breakup.
House Republicans, in fact, passed legislation Thursday that would repeal that piece of the Dodd-Frank bill known as “orderly liquidation authority.” Republicans in the lower chamber used the savings to help pay for part of their proposal to avoid avoid $55 billion in cuts to defense spending that would take place in January under the so-called “sequester.”
At the moment, the losses do not appear anywhere near severe enough to take down JP Morgan, America’s largest financial institution.
“This is not a risk that is life-threatening to JP Morgan” Dimon said on “Meet the Press” on Sunday. “This is a stupid thing that we should never have done, but we’re still going to earn a lot of money this quarter.”
Profitable, yes, but JP Morgan’s fumble comes at a tough moment for Wall Street in Washington, where new financial regulations are under review by a number of regulatory agencies.
The controversy goes to the heart of the Volcker rule, named after a former Federal Reserve chairman who is its champion. When the rule is fully implemented, banks could still participate in trades to hedge, or limit, their exposure to any one area of the market. They could similarly buy or sell securities to help clients execute trades. But they could only trade at the behest of their clients.
At issue in the JP Morgan case, Corker says, is whether the bank’s moves constitute “bona fide hedging transactions” or “poorly managed proprietary trades.”
The rule’s critics assert that the way the measure has been drafted leaves regulators in the position of either being ineffective or indicting financial institutions whose bets turn against them.
“The problem is, the way that the Volcker Rule proposal reads, a lot of it depends on intent,” says Hester Peirce, a senior fellow at the Mercatus Center at George Mason University in Arlington, Va. “How do you measure intent?”
Instead of a regulator trying to sort hedging from trading, “markets are excellent at punishing bad trading decisions, regardless of who makes them,” Ms. Peirce writes in a short analysis of the JP Morgan situation on the Mercatus website.
“A regulator is far less likely to prevent another such trading loss than Jamie Dimon’s desire to avoid making another call like this anytime soon,” she adds.
Democrats, however, see a clear justification for attempting to drive a wedge between banks that receive federal deposit insurance and trading strategies that risk large losses.
JP Morgan’s loss “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,” said Sen. Carl Levin (D) of Michigan in a statement Thursday.
Asked how he would respond if critics took to the Senate floor to savage JP Morgan for its shortcomings, Dimon demurred during a call with financial analysts last week. The $2 billion loss “is very unfortunate,” he said. “But the fact of it is this does not change analysis, facts, detailed argument” about the future of financial reform.
Of course, congressional hearing rooms are seldom ruled by analysis and detailed argument. And members of both parties could have a bit more rhetorical ammunition as they head into hearings on the subject in coming weeks: Dimon said the firm could lose another $1 billion or more.
“It is risky, and it will be for a couple of quarters,” Dimon told financial analysts last week.
Dimon then vowed that the firm is willing to manage the trade through a volatile period with the hopes of eventually recouping some losses.
With his bank in Congress’s sights, it may be even more volatile still.