JPMorgan Chase Trading Fiasco: What to Do about Big Banks?

Article excerpt

JPMorgan's loss of $2 billion shows that the forces that unleashed the recession remain partially untamed - and that Congress is still struggling to get a handle on the solution.

The fallout from a massive investment loss at JPMorgan Chase continued to spread Wednesday, as shareholders filed lawsuits against the bank and members of Congress used the incident to defend strong bank regulation - or to promote more of it.

Investors filed two lawsuits against the firm, alleging that the firm took undue risks and made misreprentations to shareholders prior to last week, when the firm announced the losses. Chief executive officer Jamie Dimon called the trading errors "egregious" and the losses "self-inflicted."

In Congress, lawmakers used a hearing on bank regulation to raise concerns about the JPMorgan investments that went awry. Some lawmakers argued for breaking up the largest banks, which include JPMorgan.

And Sen. Bernie Sanders (I) of Vermont called for new legislation to remove conflicts of interest between regulators and Wall Street banks. Two-thirds of the Federal Reserve's regional-bank board members are appointed by the banking industry, Senator Sanders noted in a letter to his fellow lawmakers. Mr. Dimon is now serving as a director of the Federal Reserve Bank of New York.

All these developments are signs that, more than three years after a financial crisis plunged America into a deep recession, the question of how to maintain a healthy bank system is still a hot one - and that industry's risks remain at least partially untamed by new laws or managerial self-discipline.

Even before the loss made headlines, congressional hearings were under way on how to implement the Dodd-Frank banking reforms of 2010, and whether additional changes should be made to financial- system oversight.

Among the important questions being considered:

How to implement the so-called "Volcker rule" in Dodd-Frank to limit banks' investment activity.

Whether to break up large banks - a legislative long shot, supported by some lawmakers.

Whether some broader constraints on financial risk are needed.

Now, the JPMorgan loss has colored all these conversations, with both sides employing it for their arguments.

Sen. Bob Corker (R) of Tennessee last Friday urged the Senate Banking Committee to hold a hearing on what the debacle implies for bank-system soundness. JPMorgan's loss arose from credit-derivative bets on European corporate debt, involving a trader who became known in credit markets as the "London Whale."

Rep. Ed Royce (R) of California on Wednesday used the JPMorgan affair to defend a post-crisis boost in the capital cushion that big banks are required to hold - a shift that some critics have said is harming economic growth. "I hope that recent incidents put that argument at rest," Congressman Royce said at a House Financial Services Committee hearing, eliciting agreement from one of the regulators testifying. …