JPMorgan case puts Volcker Rule and SIFIs back in the spotlight
By Patricia Lee
NEW YORK, May 23 (Thomson Reuters Accelus) – The massive losses which resulted from JPMorgan Chase hedging its positions against derivatives has once again cast the spotlight on the Volcker Rule and whether systemically important financial institutions (SIFIs) are too big to fail, industry observers said. Questions have also been raised about the firm’s hedging strategy, and what constitutes hedging in the first place.
Industry officials in Asia suggested that JPMorgan’s $2 billion hedging losses might embolden regulators to strengthen the Volcker Rule, on the premise that it would be of benefit to SIFIs. The rule, named after former Federal Reserve chairman Paul Volcker, forms part of the Dodd-Frank Wall Street Reform and Consumer Protection Act and has proposed the separation of proprietary trading from commercial banking activity. Most notably, it has argued against investing in derivatives or using derivatives as a hedge on investments. The rule has, however, faced strong opposition from many of the large global financial institutions. (more…)
JPMorgan AGM punctured by thorny hedge issues
By Christopher Elias
LONDON/NEW YORK, May 17 (Business Law Currents) - JPMorgan’s disastrous $2 billion hedge loss has raised some thorny issues on management oversight, corporate governance and the effectiveness of the Volcker Rule, as division at the banking giant’s annual general meeting highlight a growing tension between its shareholders and management.
Little more than a week ago, prior to Tuesday’s annual general meeting (AGM), JPMorgan announced that it had incurred a $2 billion loss as a result of a hedge gone wrong from its London offices with the possibility of $1 billion in additional losses to follow. (more…)
JPMorgan, warned earlier over risk governance, highlights oversight challenges
By Emmanuel Olaoye, Julie DiMauro and Randall Mikkelsen
NEW YORK, May 15 (Thomson Reuters Accelus) - Corporate executives and boards face big challenges monitoring risk at complex banks like JPMorgan Chase & Co, which was warned by an investor group last year that its board had “serious deficiencies” and was not up to the task.
Challenges to connecting the dots to form a clear risk picture at sprawling global institution with multiple business units like JPMorgan include difficulties tracking data, differing regulatory jurisdictions, and crucially, inadequate corporate governance. (more…)
JPMorgan may tip Wall Street’s hand on ploys to beat Volcker
NEW YORK, May 14 (Thomson Reuters Accelus) - JPMorgan Chase & Co’s revelation that it had trading losses of at least $2 billion on a failed hedging strategy may have tipped the hand to one way Wall Street executives plan to get around the Volcker Rule.
The incident shows how firms could use the pending rule’s hedging exemption to do proprietary trades and still technically be compliant with Volcker. It could allow firms to keep some proprietary trading desks, but portray them to regulators as something else, such as portfolio hedging. (more…)
The derivative hedging game played by JPMorgan Chase is no different than that played by AIG in 2008.
Yet, Jamie Dimon tells us that Chase had merely “made a terrible, egregious mistake.”
He might as well have said that Chase was wrong in raising in a game of poker, when it would have been more prudent and folded. But why was Chase busy gambling in the first place — right after our economic meltdown, and while fighting government regulation?
One answer is because Chase could bear the gambling losses.
That’s right. With $2 trillion at hand, Chase 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 nice to know because the government should start dismantling big banks before they fail — and before they have another chance to take us down with them.
The important lesson then from this Chase episode is not that stringent regulations are needed to reign in on derivatives, but that banks big enough to take huge hits standing up are ripe enough for us to chop down to size.
Banking on Volcker: Big Crisis, Big Rule
By Thomson Reuters Accelus staff
NEW YORK, Oct. 19 (Business Law Currents) – Banking lawyers should be forgiven if they’re not returning calls right away: they’re busy trying to digest the Volcker Rule (or “the rule”). The proposed rule’s 298-page doorstop represents the collective efforts of the Treasury Department, Fed, FDIC and SEC to implement §619 of the Dodd-Frank Act, which itself added a new §13 to the Bank Holding Company Act of 1956 (the BHC Act). The intent of the Volcker Rule is to “generally prohibit any banking entity from engaging in proprietary trading or from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with a hedge fund or private equity fund (“covered fund”), subject to certain exemptions.”
So does the Volcker Rule satisfy its mandate? To paraphrase ‘The Simpsons’: yes with an “if,” no with an “unless.” The rule carves out significant exemptions from the proscription against proprietary trading, but each of these exceptions has a number of criteria required to take advantage of the exemption. Moreover, a number of the rule’s measures provide for rebuttable presumptions of non-compliance for certain types of trading activity. (more…)
PREVIEW-Final act begins in U.S. Congress on Wall St reform
By Kevin Drawbaugh
WASHINGTON, June 7 (Reuters) – Negotiators from the U.S. Senate and House will begin meeting this week to craft a final Wall Street reform bill, with banks facing changes that threaten their profits, if not their business models.
Some congressional Democrats want to fashion a bill that forces a basic banking industry restructuring, but leaders will have to balance that agenda against the need to forge compromise legislation that retains some Republican support.
Analysts are expecting that fundamental restructuring will be avoided, “This bill is more about profitability and less about viability. That means the legislation will hurt the banking sector, but it will not sink it,” said Jaret Seiberg, a policy analyst at investment firm Concept Capital.
The delicate task of crafting a winning compromise will fall to Representative Barney Frank, who will chair the “conference committee” getting under way in a few days, and Senator Christopher Dodd, a consensus builder who will lead the Senate negotiating team.
Both lawmakers are old-school liberal Democrats with more than 60 years on Capitol Hill between them. They will need all of that experience to finish up a legislative project that is at the top of President Barack Obama’s priority list.
Disputes loom over banks’ lucrative dealings in derivative contracts, such as credit default swaps; the amount of capital they must set aside for hard times; and the trading they do on their own books unrelated to customers’ needs.
COLUMN-Volcker Rule unexpectedly revived by Dodd bill: John Kemp
– John Kemp is a Reuters columnist. The views expressed are his own –
By John Kemp
LONDON, March 16 (Reuters) – Paul Volcker’s proposed ban on banks’ proprietary trading or owning hedge funds or private equity funds has been unexpectedly revived in the financial regulation bill published by Senate Banking Committee Chairman Christopher Dodd yesterday.
The Volcker Rule’s surprise survival comes despite fierce opposition from the banking industry and after many commentators had written it off as a short-term political gimmick in the wake of the shock election defeat in Massachusetts. Dodd himself had appeared lukewarm.
In fact, Section 619 of the bill (“Restrictions on Capital Market Activity by Banks and Bank Holding Companies”) would give legislative effect to the proposals almost exactly as outlined by President Barack Obama at the press conference in January.
BANS ON PROP TRADING, HEDGE FUND SPONSORSHIP
Section 619 (b) instructs the new Financial Stability Oversight Council (FSOC) to issue rules that “prohibit proprietary trading by an insured depository institution, a company that controls an insured depository institution or is treated as a bank holding company”.
Obama reasserts Volcker rule, U.S. Senate bill seen
WASHINGTON, March 3 (Reuters) – The Obama administration reasserted its commitment to banning proprietary trading by banks with draft legislative language on Wednesday, despite signs that the U.S. Congress is unlikely to adopt such a rule.
In a scant five pages from the Treasury Department, the administration put a two-year phase-in on its “Volcker rule” to curb “prop trading” — or buying and selling of investments on financiers’ own books unrelated to customer needs.
The rule would apply to banks, with limits slapped on large, non-bank financial firms, as well. In addition, banks would be barred from sponsoring or investing in hedge funds and private equity funds, under the administration’s language.
While key details were left up to regulators, the language showed the White House is determined to push ahead with a rule it first proposed in January, as the U.S. Senate inched its way toward acting on new financial reform legislation.
Authored chiefly by White House economic adviser Paul Volcker, the rule arrived late in a reform debate that has raged for months since the severe 2008-2009 financial crisis tipped the U.S. economy into a deep recession.
President Barack Obama in mid-2009 proposed a comprehensive package of reforms aimed at preventing another crisis. Most of them were embraced in a bill approved in December by the House of Representatives, but the Volcker rule was not in the mix.
By the time Obama and Volcker unveiled it almost six weeks ago, the Senate was well along in its debate about reforms. The Volcker rule complicated Senate Banking Committee Chairman Christopher Dodd’s task of moving a reform bill to the Senate floor, and he has still not managed to do that.
Obama lays out “Volcker rule” specifics for Congress
By Karey Wutkowski and Rachelle Younglai
WASHINGTON, March 3 (Reuters) – U.S. banks would be banned from proprietary trading and other large financial firms would face quantitative limits on such activity, according to draft language on the so-called “Volcker rule” from the Obama administration.
The language maintains the toughest components of the proposal first floated in January, despite skepticism from lawmakers and the industry that such restrictions would do little to prevent another financial meltdown like the one that seized markets in 2008.
Banks would also be banned from investing in or sponsoring hedge funds and private equity funds, according to a draft version of the legislative language obtained by Reuters. A final version of the language is expected to be sent to lawmakers later on Wednesday.
The proposal would prevent a financial firm from acquiring another company if the resulting firm would have more than 10 percent of the liabilities of the financial system.
President Barack Obama announced in January that he would propose these limits, named after White House economic adviser Paul Volcker. Obama said additional safeguards were needed to prevent the build-up of risk in the financial system.
The announcement in January of the Volcker rule came months after the administration’s proposals in mid-2009 for other financial reforms, prompting Senate Banking Committee Chairman Christopher Dodd to complain that the Volcker rule was late to the show and looked transparently political.
BREAKINGVIEWS-Volcker Rule looks more like hype than future law
– The author is a Reuters Breakingviews columnist. The opinions expressed are his own –
By James Pethokoukis
WASHINGTON, Feb 15 (Reuters Breakingviews) – The much-hyped Volcker Rule proposal is failing fast in the U.S. Congress. Paul Volcker probably isn’t that surprised. The former Federal Reserve chairman joked he was “just a photo op”, even after President Barack Obama’s public embrace of his proposal to limit bank proprietary trading. The problem is that legislators are no longer interested in sweeping reform.
Any reform plan has to get through the U.S. Senate Banking Committee. Now that the mood of crisis has passed, Wall Street campaign contributions and Republican intransigence are paramount there. That means the new negotiating tag-team — Democrat Chris Dodd, the chairman, and Republican freshman Bob Corker — is not going to agree on anything radical. Corker says the Volcker Rule will not be a “major topic” for discussion, and that is probably OK with much of the committee.
Increasingly, the Volcker Rule looks more like a stunt than a viable solution. Though Volcker had been pushing it for months, the White House endorsement came as surprise to both the Banking Committee and banking industry. That is a poor way to introduce serious legislation in Washington.
Lame-duck Dodd sees reform as his legacy, so he wants a bill passed by early summer. His view: The Volcker Rule is a sudden and unwelcome complication.
Cynics always saw the Obama endorsement as no more than a populist, knee-jerk response to the Democrat’s loss of a Massachusetts U.S. Senate seat. Even some advocates of the Volcker Rule admitted the plan didn’t directly address the regulatory failures that contributed to America’s financial meltdown.
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