By Pamela J. Bethel
The announcement that JPMorgan Chase recently lost at least $2 billion due to ill-advised hedge fund trading could not have come at a worse time for the banking industry and for Jamie Dimon, the mega-bank’s CEO.
That’s because banking regulators are close to agreement on the content of the so-called Volcker Rule, a key part of the 2010 Dodd-Frank financial reform legislation that would prohibit banks from trading for their own benefit with customers’ money. The idea behind the rule is to prevent the possibility of any harm to federally insured deposits that might occur if banks engage in risky trading. Congress didn’t spell out the details of the rule but left them up to the regulators to decide.
“Dimon had been one of the most effective critics of the Dodd-Frank Act. Now he’s Exhibit A in the case for why limits on risky trades by big banks are needed,” wrote Kent Hoover, Washington bureau chief of the American City Business Journals chain, in a recent column.
Now, Dimon will be hauled in front of the Senate Banking Committee this summer to explain the surprise trading loss, how it took place, and what JPMorgan Chase could have done to prevent it. So the company’s financial follies will remain in the public eye for months to come.
JPMorgan has described the trades in question as falling generally in the category of hedging, a type of trading that banks say is designed to protect their investments and keep the markets as a whole in a stable position. This, they say, is economically beneficial – not to mention profitable for them. Before the big dollar loss was announced, the banking industry was trying to get financial regulators to understand its position and to limit the breadth of the Volcker rule, which is expected to be announced possibly as early as this summer.
The $2 billion loss may not have a material impact on JPMorgan Chase’s profitability, but it will certainly have an impact on its public reputation and on its credibility when it tries to make the case against a stronger Volcker Rule.