JP Morgan Chase & Co. chief executive Jamie Dimon told members of the Senate Banking Committee today that it is unrealistic to think on-site regulators could have prevented the firm's $2 billion-plus trading loss, which he characterized as "purely a management mistake."
But he argued the solution is not more regulation. Dimon called the pending Volcker rule, which includes a ban on banks making short-term trades for their own profit, "unnecessary," even as he conceded it was "possible" its restrictions could have applied to the failed trades.
"I believe in strong regulation — but that’s not always more regulation," Dimon said, complaining that the Dodd-Frank Act "created a really complex [system], where it’s hard to figure out who is responsible" for oversight.
Republicans on the committee were sympathetic. "Dodd-Frank really missed the mark," said Sen. Bob Corker (R-Tenn.). Added Sen. Jim DeMint (R-S.C.), "There’s a temptation every time something goes amiss to add a regulation....A lot of us are frustrated bankers who want to run your business for you."
It was left to committee Democrats to point out that the federal government insures deposits, that taxpayers may be on the hook for bailouts, and that a bank failure threatens overall financial stability.
"I disagree that less supervision and less regulation will magically make the system less risky," said committee chair Tim Johnson (D-S.D.). "While risk cannot be eliminated from our economy, we can, and must, demand that banks take risk management seriously and maintain strong controls. We must also demand that regulators do their job well."
The last major piece of the Dodd-Frank Act awaiting implementation is the Volcker rule, which is currently being drafted by the five federal agencies that oversee financial markets.
Dimon said he was less concerned about the draft rule’s limits on proprietary trading, which he said would have allowed the type of portfolio hedging against risk that served JP Morgan so well during the economic downturn in 2008. He did admit it was possible that the rule might have stopped the activity by a firm trader dubbed "the London Whale" responsible for the loss. The trader placed huge bets on an obscure index in the name of hedging risk. "It may very well have stopped part of what this portfolio morphed into, I don’t know," Dimon said.
But Dimon was far more worried about how the massive rule — the draft version is 300 pages long — will affect market making activity (A "market maker" is a company that stands ready to buy and sell stocks listed on an exchange). "Don’t throw the baby out with the bath water,” Dimon said, noting that “the cost to buy or sell a share of stock is one-tenth of what it was years ago."
He continued, "We have the widest, deepest capital market in the world. It would be a shame to shed that out of anger. All that we’ve asked with the Volcker rule is to go through the details and get it right."