Dodd-Frank opponents return to the drawing board

May 14, 2012

By Daniel Indiviglio
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

JPMorgan has given financial reformers at least two billion reasons to insist on more aggressive oversight of the banking industry. In the wake of last week’s trading loss, presidential contender Mitt Romney and other Republicans will have to rethink their rhetoric around gutting the Dodd-Frank Act and, more specifically, its Volcker Rule provision. Voters may no longer believe that big banks can manage their own risks, which leaves making banks smaller the alternative to tighter regulation.

Jamie Dimon reiterated over the weekend that JPMorgan’s loss at its chief investment office came from mistakes made hedging its loan portfolio. The trading led to more – not less – risk. But portfolio hedging isn’t the sort of activity limited by the Volcker Rule, which is meant to prevent banks from betting with capital secured by customer deposits. Still, that hedging went awry. While the bank’s capital can handle the hit, the episode has critics rightly complaining that even a bank as seemingly bullet-proof as JPMorgan is too complex to manage its own risk.

And that presents a political problem. Dimon has been outspoken about the flaws of Dodd-Frank, and Republicans have largely nodded in agreement. Presidential hopeful Mitt Romney has promised to repeal much of the 2010 law if elected. This episode shatters that strategy. The GOP shift may already have begun. On Friday, Senator Bob Corker called for a hearing to learn more about JPMorgan’s loss and what such mistakes mean for taxpayers. As recently as February, he was pushing to weaken the Volcker Rule.

Republicans will need to come up with a strategy to end too big to fail without increasing the government’s footprint in finance. If embracing Dodd-Frank is not an option, do not be surprised to see many in the party adopt a more radical idea, and one embraced by Dallas Fed President Richard Fisher: breaking up the banks.


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The derivative hedging game played by JPMorgan Chase is no different than that played by AIG in 2008.
Yet Jamie Dimon tells us that JPMorgan had merely “made a terrible, egregious mistake.” He might as well have said that the bank was wrong to keep raising in a poker game when it was apparent it should have folded.
And why was JPMorgan busy betting in the first place — right after our economic meltdown, and while fighting government regulation?
One answer is that it knew it could bear the gambling losses.
That’s right. With $2 trillion at hand, JPMorgan can yawn when $3 billion goes down the tube.
Nonetheless, Dimon tells us that he sees no problem with the government dismantling big failing banks. This is good to know because the government might have to start dismantling big banks before they fail — and before they have another chance to take us down with them.
The important lesson from the JPMorgan fiasco is not that stringent regulations are still needed to reign in on derivatives, but that banks big enough to remain standing after taking huge hits are ripe enough for us to chop down to size.

Posted by kafantaris | Report as abusive

The American people will no longer listen to the banking industries pathetic greedy excuses or demands nor will they tolerate anything but reverting back to Glass-Steagall Act and the division of banking between commerical and investment. Anything less and you will have riots and anarchy because we, the American people have had it with these spoiled arrogant banker/robbers and the politicians who prostitute themselves to these robbers.

Posted by JLWR | Report as abusive

Strong banks do not equal strong economies. Banks are there to lend money to the real money-makers and job creators. They should be in the background like a stage hand. Keep them regulated and in their place.

Posted by AlkalineState | Report as abusive

Hahahaha, Republicans advocating breaking up the banks, hahahahhaha….good one man….haha….. my stars….tears streaming…..

Finish the Volcker Rule, Reinstate Glass Steagall. There are many individual honest brokers in the finance community, but there are many sociopaths as well. This industry has a huge impact on the lives of every American, and therefore must be the tightest regulated.

Also chain Capital Gains and Estate Taxes to the Misery Index or Unemployment Rate or the median household wage or something along those lines. Get everyone pushing in the same direction for once.

Posted by ChevalierMalFet | Report as abusive