How JPMorgan Chase Fell Victim of Its Own Success
JPMorgan Chase lobbyists persuaded the corrupt Washington politicians to make holes in the regulatory laws that have kept the US financial systems safe for decades. Their sole objective was to obtain special breaks that would allow banks to make big bets to earn fast bucks. Those holes, known as Portfolio hedging, had an impact so large that “trucks could be driven through” and finally they themselves had a free fall through the hole, losing $2 billion, which is not only rocking them, rocking the entire banking system.
Named after the famous Fed Chief Paul Volcker, the Volcker Rule that was to be instituted by Congress to tame the wild Wall Street, would have prevented the proprietary trading that JPMorgan had been dealing with, after their chief executive, Jamie Dimon, and his top aides lobbied the regulators against.
President Obama is often touted as the Wall Street man, but it was him who took the initiative to contain the untamed Wall Street after Bill Clinton signed away the Glass-Steagall Act that had regulated the banking industry until that time—1999. It was the GOP congress that lobbied for that deregulation and Bill Clinton had meekly surrendered.
When Obama’s effort to bring back the regulation was taking shape in the official draft of the Volcker Rule regulations, released last October, JPMorgan and other banks made a full throttle assault on that new effort. As early as in February, a team of JPMorgan executives met Fed officials and cautioned them that any tightening of the trading rules would hurt the banks’ hedging activities and impact their profitability. Ironically, in that February meeting was Ina Drew, the head of JPMorgan’s chief investment officer, whose unit has now suffered the gargantuan $2 billion loss.
Portfolio hedging is a strategy that allows banks to consider an investment portfolio as a whole and take actions to offset the risks of the entire portfolio in contrasts with the traditional procedure where an individual security or trading position is considered for risk. In other words, this method actually increases the risk manifold without bringing it in the lime light. The Michigan Democrat Senator Carl Levin said, the Portfolio hedging “is a license to do pretty much anything."
This JPMorgan Chase debacle clearly demonstrates that the Glass-Steagall Act must be brought back, and Obama understands this, as he took the initiative with the so called Volcker Rule. No wonder Wall Street is not filling his war chest for the November election this time; their money is flying to Mitt Romney.
Keep your eyes open voters!