Dimon Calls "Volcker Rule" Unnecessary

by John M. Curtis
(310) 204-8700

Copyright June 15, 2012
All Rights Reserved.                                         

             Apologizing to the Senate Banking Committee for recent high-risk derivatives trading losses, JPMorgan Chase & Co.’s Jamie Dimon dismissed the loss as an “isolated event.” In the wake of the 2007-2008 economic meltdown, Dimon called new trading regulations under the July 20, 2010 Financial Reform Bill “vague” and “unnecessary,” especially the so-called “Volcker Rule,” preventing banks from engaging in high-risk proprietary trades. Dimon apologized for calling April 13 JPMorgan’s $2 billion loss a “tempest in a teapot,” minimizing losses to the company from London’s trading desk known as the “Blue Whale.” Instead of more regulation, Dimon insisted financial reforms should deal with capital, liquidity, risk measures and risk controls, in what amounts to a colossal non-sequitur. Dimon surely knows as a savvy CEO that derivative trading is risky business.

              Starting July 12, derivative trading under the “Volcker Rule” will be heavily restricted, essentially reinstating a key feature of the 1933 Glass Steagall Act that attempted to prevent another stock market crash and Great Depression. Former Federal Reserve Chairman Alan Greenspan compared the 2007-08 financial collapse to the 1907 Financial Panic prompting the 1913 creation of the Federal Reserve Bank. Dimon insisted to a skeptical Senate Banking Committee that he was misinformed by his Chief Investment Officer Ina Drew about the synthetic trading portfolio used to manage risk that “ultimately resulted in even more complex and hard-to-manage risks.” Trading losses from the May 10 London-based trades could exceed $5 billion according to the Wall Street Journal. Dimon passed off the Drew’s trades as an “isolated small issue,” minimizing he damage.

              Instead of questioning JPMorgan’s current exposure to the derivatives’ market, the Senate Banking Committee offered little insight into how the one institution that escaped the 2007-08 financial collapse was now wheeling-and-dealing in the industry’s most speculative investments. When Sen. David Vitter (R-La.) tried to get Dimon’s view on the “Volcker Rule,” Dimon insisted he was misinformed by his now retired CIO Ina Drew about the extent of trading losses. Jamie hasn’t yet admitted that his industry needs more regulation to prevent future losses. “I was assured by them they though this was an isolated small issue and that it was not a big problem,” Dimon told the Committee. “When I made that statement [tempest in a teapot], it was wrong,” admitting that trading losses were far worse. What Dimon hasn’t admitted is that there’s a lack of institutional control coming from his office.

               When Ina fell on her sword May 14, fingers pointed away from Dimon’s Park Avenue executive suite. It’s not credible to believe Dimon was duped by his ultra-slick CIO. Having come up the ranks in 1998 under the wing of American Express’s Sandy Weil, served in 2000 as CEO of Columbus, Ohio-based Banc One and promoted in 2004 as JP Morgan bank president after the merger and then CEO in 2006, there’s not much that gets past Jamie. Dimon tap-danced around the Senate Banking Committee, insisting JPMorgan Chase & Co. faces far more systemic risks from “dramatically rising interest rates and a global type of credit crisis.” In case Jamie hasn’t checked, interest rates are at historic lows and Europe’s problems also stemmed from risky derivatives’ trading. Spain’s recent insolvency requiring $125 billion Eurozone bailout stemmed from derivatives’ losses.

             Asked by Sen. Chuck Schumer (D-N.Y.) why JPMoragan’s risk committee missed the “Blue Whale” London trading mishap, Dimon seemed nonplused. “I think it would have been hard to capture it if management didn’t capture it,” said Dimon, making no sense at all. “To the extent that we were misinformed, they were misinformed,” referring his office and the risk committee. Management didn’t capture it precisely because derivative trading is a usual-and-customary part of JPMorgan’s trading strategy and culture. Dimon wasn’t misinformed, he knew fully-and-totally the risks involved in derivatives’ trading. “It’s hard to have unrealistic expectations to capture things like this,” said Dimon, telling the Senate Banking Committee that he needs the “Volcker Rule” more than ever. His reluctance to embrace the “Volcker Rule” stems from worry about losing derivatives quick-and-easy profits.

            Showing the pleasant disposition that helped Jamie rise to the top can’t hide his culpability as CEO in JPMorgan’s risky derivatives trading. Claiming he and his risk committee were misinformed doesn’t pass the smell test and makes no sense. Jamie knew the risks, had won in the past and hoped to do it again. This time he proved he and his former CIO were mere mortals, vulnerable to getting burned like everyone else. “We will lose some of our shareholders’ money—and for that, we feel terrible—but no client, customer or taxpayer money was impacted by this incident,” skirting the real issue of whether or not proprietary derivatives trading is too risky for the banking industry, either shareholders or depositors money. Whether Jamie admits it or not, he knows that the banking industry needs the “Volcker Rule” and much more to protect shareholders and depositors money.

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