Member Perspective: Occupy the SEC, JPMorgan-Chase, & the Volcker Rule

Through its London office, JPMorgan-Chase (JPMC) hedged its overall position and did so with a big enough splash (the Whale) to call attention to itself.  It lost big and is still losing, but that fact is irrelevant.  The only significant question is whether this kind of activity was prohibited by the Volcker rule.  No, says the Comptroller of the Currency (OCC), one of the five federal regulators for the Volcker Rule.  Taking the OCC at its word, there is no story.
Alternatively, there is a story, which is that JPMC did violate the Volcker rule, perhaps not the law’s letter but certainly its intent.  That presumably is the position of the FDIC, which insures deposits at JPMC, and the Fed, which gives JPMC access to its discount window.

If they are correct and the OCC is mistaken, then the Volcker rule comes into question.  It is unlikely to be junked, so it will have to be tightened sufficiently so that the next time JPMC does something like this, the OCC will think there is a story.

That august group called Occupy the SEC (OSEC) aims to work by consensus. On the topic of JP Morgan’s loss, however, it is more like the Supreme Court: producing a majority opinion as well as one or more dissents along the way.   The majority opinion is that the Volcker rule has to be tightened.  The dissenting opinion, at least the one represented by the author of this comment, is that Congress would do better to junk the Volcker rule, start from scratch, and reenact the walls-of-separation familiar to us all from Glass-Steagall.  That minority view will be argued here.

Start with Glass-Steagall itself.  Its hallmark was its separation-of-powers doctrine, which in its case took the form of a separation of commercial banking from investment activities.   Imagine a commercial bank named Chase located on Main Street  and an investment bank named JPM (without the C) located on Wall Street.   Chase makes business loans, JPM makes investments.  JPM authorizes its London Whale to bet big, whether as hedging or not doesn’t matter.  What matters is that the Whale is incurring risks in the names of investors who know what they’re doing and give their consent.
Now what happens if it all goes South, as we like to say, and the investors lose $2 billion, maybe more, because of an investment strategy that was “flawed, complex, poorly executed, poorly vetted and poorly executed,” to use the words of Jamie Dimon at the recent Tampa shareholders‘ meeting.   What do investors do with an agent who says, “I can’t justify what happened” and that “unfortunately these wounds were self-inflicted.”

The answer seems obvious enough: you do what the district attorney would do with a suspect who confesses.   You bring Dimon before a court, present the confession as evidence, get the man convicted and then enjoy the spectacle of his execution as the next best thing to getting your money back.

But the shareholders did nothing of the sort.  They instead confirmed Dimon as CEO and chairman of the board, affirmed his salary at millions of dollars, and gave him a few verbal slaps-on-the-wrist.  The courageous Dimon made Ina Drew the fall-guy, but no one doubts that her severance package will be in the millions.  That Dimon lives to try it all again under a tightened Volcker rule should be sufficiently damning to condemn the rule itself.
So the trouble is with a rule the OCC thinks allowed Jamie Dimon to do what he did.  The trouble is also with a tightened version of that rule, for by the time the regulators get to writing it, Dimon will have gotten beyond his mea culpas and be supporting the new rule while lobbying for exceptions to it.

So what we need is a new two-part rule that allows Dimon to remain in place either at the head of an investment bank called JPMorgan or at the head of a commercial bank called Chase.  If he stays on Wall Street, then the investors will flee or they’ll throw him to the lions if be bets their money and loses it.  Or, under the aegis of a restored Glass-Steagall, Dimon opts to move over to Main Street and goes into the respectable business of dishing out commercial loans, in which case he most likely does not get in trouble.

A resurrection of Glass-Steagall would also allow sinners like Jamie Dimon to become honest people.  If Dimon bet big and lost, he would be able to say, “I bet the house (or houses, in his case) and lost.  It was my money, I knew what I was doing, and I have no regrets.”  Or the last sentence would read: “the money belonged to investors, I didn’t know what I was doing, and I have a lot of regrets because they just sacked me.”  Either way, we could all respect Jamie Dimon.  Right now, under the aegis of the Volcker rule, deep in the realm of legislated hypocrisy, the poor man is forced to lie every time he opens his mouth.

Bob Sullivan

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