This post is adapted from the author’s testimony at a recent hearing before the U.S. Senate Banking, Housing, and Urban Affairs Committee.
In light of JPMorgan Chase’s bad derivatives trades, the media’s spotlight has appropriately turned to the pending Volcker Rule. That’s the moniker for the still-under-development regulation that might restrict big banks from pursuing hedging strategies across their entire portfolio, including their own bets. Proponents say banks shouldn’t be able to do this, since banks hold consumer deposits that are effectively guaranteed by taxpayers and since taxpayers could be forced to bail out a foundering bank if it’s deemed too big to fail. On the other hand, the underlying law for the Volcker Rule, the Dodd-Frank financial reform law, specifically exempts or allows hedging related to individual or “aggregated” positions, contracts or other holdings, which may very well have covered JPMorgan’s recent trade.
Analysts are scrambling to interpret the voting results from Greece’s first election since the crisis began in late 2009, hoping to accurately gauge the political risk that a new parliament in Greece will successfully (and meaningfully) renegotiate the previous austerity accords. At stake is the ongoing debt-financing support from the International Monetary Fund, European Commission and European Central Bank. Already the triumvirate has warned that it will not follow through on the next loan disbursement unless the new Greek government also follows through in detailing next month how it will achieve budgetary savings of more than 11 billion euros for 2013 and 2014.
Last week, a debate erupted about whether the government’s massive Troubled Asset Relief Program (TARP) made or lost taxpayers money. Assistant Secretary for Financial Stability Timothy Massad and his colleagues at the Treasury Department argue that TARP is going to end up costing a lot less than originally expected and may even end up turning a profit for taxpayers. Breakingviews Washington columnist Daniel Indiviglio scoffs at this, arguing that TARP “looks more like a loss of at least $230 billion.”