Volcker high ground conceded by JP Morgan’s self-induced low blow?

The odds that watchdogs and lawmakers will slacken their stance on financial regulation got a little longer last Thursday after JP Morgan admitted to losing US$2 billion on a bad bet.

Trading for the firm’s ‘Office of the CIO’, apparently trader Bruno Michel Iksil – otherwise known as the ‘The London Whale’ – took a huge position on credit derivatives which didn’t make good.

According to a member of the office, ‘CIO’ is essentially supposed to run as a treasury department with muscle that manages the house’s exposures. But rather than just hedge, it seems JP Morgan’s CIO office was more inclined to take a view on the markets and punt like a prop trading desk.

Until last week JP Morgan had had a ‘good’ crisis, which allowed chief exec Jamie Dimon to stand as a harsh critic of the current course of Dodd-Frank and financial regulation. Any high moral ground it may have had now seems entirely self-eroded.

“The strategy we had was badly vetted. It was badly monitored. It should never have happened,” Dimon said in an interview on NBC on Sunday. “This is a very unfortunate and inopportune time to have had this kind of mistake. We hurt ourselves and our credibility. We’ve got to fully expect and pay the price for that.”

No truer words could have been said but it is not just JP Morgan’s credibility which has been hurt – it’s the entire industry’s.

Whether or not regulatory constraints like the Volcker Rule ban on prop trading and Basel III’s increased minimum capital requirements wouldn’t have protected the firm against the bets reportedly made by The London Whale is a moot point. After Thursday’s revelations, how could anyone possibly hope to convince lawmakers and the general public that banks can be trusted to be responsible with their hedges and refrain from prop trading?

On Friday, Congressman Barney Frank, ranking member on the House Financial Services Committee, summed up Washington’s sentiments on the matter: “The argument that financial institutions do not need the new rules to help them avoid the irresponsible actions that led to the crisis of 2008 is at least $2 billion harder to make today,” he quipped. “This regrettable news from JPMorgan Chase obviously goes counter to the bank’s narrative blaming excessive regulation for the woes of financial institutions.”

Rubbing salt in the wounds, Frank mused that in The Economist’s long-running campaign against the financial reform bill which bears his name, one of their leading examples of the harm the bill was doing was JPMorgan’s assertion that complying with the new rules will cost US$400 to US$600 million at the outset.

“JP Morgan Chase – entirely without any help from the government ­– has lost in this one set of transactions, five times the amount they claim financial regulation is costing them,” said Frank. “Most large financial institutions and organisations which represent them have strongly opposed the Volcker Rule, and have worked to weaken the final rule and slow its implementation.”

As federal agencies scramble towards an increasingly fanciful 21 July implementation date for Volcker, it’s likely they will be increasingly less open to arguments for weaker regulation. Fewer lawmakers certainly are.

Barely a week before JP Morgan’s revelation, on 3 May the Basel committee on banking supervision launched a fundamental review of trading book capital requirements. Responses to that document will doubtless include JP Morgan’s bad bet as evidence for increased requirements.

Dimon hasn’t done himself any favours in Basel. At a meeting of the International Monetary Fund in Washington last year, he reportedly attacked Mark Carney, head of the Basel-based Financial Stability Board, calling its proposed capital rules “anti-American” and “cockamamie nonsense”, goading Carney so much the FSB head left the room.

As the FSB deliberates these rules, it would be surprising if Dimon’s jibes and the actions of his company weren’t top of Carney’s mind.