Loss racked up in division of bank supposed to reduce risk will hinder boss Jamie Dimon’s ability to water down Volcker rule
Jamie Dimon has been quick to admit that the stunning $2bn (£1.2bn) trading loss racked up in a division of the bank that is supposed to reduce risk “plays right into the hands of a bunch of pundits out there”.
Until last Thursday, Dimon had been able to use his position as chief executive of the biggest bank in the US to argue against proposed changes to regulation that would stop banks like JP Morgan using their own cash to take bets on financial markets through proprietary trading.
He steered JP Morgan through the choppy waters of the 2008 banking crisis without hitting too many rocks. But, four years on from the crisis that rocked the industry, the $2bn loss in the “chief investment office” in complex financial instruments will hinder Dimon’s ability to water down regulations.
Giorgio Questa, former senior banker and a professor in the finance faculty at Cass Business School, said: “A lot of the people in government will use it as an excuse. It will be used politically.”
Dimon has campaigned against US regulations, especially a proposal to limit proprietary trading by banks known as the Volcker rule after its champion, former Fed chairman Paul Volcker. But Dimon has also set his face against international rules requiring banks to hold more capital, calling them “un-American”.
Yet at the bank’s annual meeting on Tuesday, Dimon insisted that “we all want better, stronger, smarter regulation” and said he supported 80-90% of the Dodd Frank Act, into which the Volcker rule will be written. A few days ago he claimed to back 70% of the Act although since then the need for regulatory reform has moved up the political agenda.
The JP Morgan fiasco has conversely strengthened Barack Obama’s stance on bank regulation as he bids for re-election in November. Republicans are pushing back against some elements of the reforms, while others who support the need for tougher rules also question whether Dodd Frank is the answer. Questa reckons the US would be better off implementing UK reforms requiring banks to erect a “ringfence” between their high street businesses and investments.
Jason Laws of the University of Liverpool’s School of Management, said that the JP Morgan incident would provide ammunition to advocates of the full-blown separation of retail and investment banking that was required under the Glass-Steagal Act introduced after the Great Depression. Many blame its repeal in 1999 for paving the way to the financial crisis.
But, even then, Laws cautions: “If regulation becomes tighter due to the introduction of the Volcker rule, banks could become even more ingenious in developing strategies that are allowable under the Volker framework, leaving the regulators to play catch-up once again.”
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