So, Jamie Dimon: What Do You Think of the Volcker Rule Now?

by Jeff Reeves | May 11, 2012 9:09 am

If Wall Street is trying to prove Paul Volcker right, they are doing a bang-up job.

Yesterday, we learned that another so-called “rogue trader” managed to lose $2 billion of dollars from a major investment bank.

That’s right: Billions, with a “B.”

A figure with nine zeros after it.

$2,000,000,000.

JPMorgan Chase (NYSE:JPM[1]) was the one taken to the cleaners this time. In the words of CEO Jamie Dimon, it was “flawed, complex, poorly reviewed, poorly executed and poorly monitored” derivatives-trading strategies that resulted in the big losses at the hands of a French-born JPMorgan employee named Bruno Michel Iksil.

Iksil had the nickname “The London Whale.” So insert jokes about blowholes here.

The baffling thing is that this nonsense keeps happening.

In September, I wrote an article with the headline, “Only on Wall Street Does Losing $2B Make You an ‘Expert.’”[2] The inciting incident then was a trader at UBS (NYSE:UBS[3]) who bled out a stunning $2 billion at the company’s investment division in the third quarter.

Then in December, you had news of John Corzine losing $1.2 billion[4] at now-defunct MF Global. Not losing as in “recording trading losses,” mind you. Losing as in “Now, where did I put my coffee mug with the alligator on it?”

How did we get here? Simple: In 1995, Republican Rep. James Leach and President Clinton’s Treasury Secretary, Robert Rubin (among others), thought previous safeguards were obsolete and out of touch. Commonly known as Glass-Steagall, these regulations prevented a host of Wall Street shenanigans — including “proprietary trading” at investment banks, where traders on the payroll play around with the markets trying to get rich.

Some warned against the repeal of Glass-Steagall, but in the go-go 1990s and early 2000s it was hard to argue against the raging bulls on Wall street. Then, the financial crisis brought the harsh reality of a Wall Street free-for-all into the public eye. The very real consequences to risky behavior affected the entire global economy, causing even some respected Wall Street insiders to admit the financial services industry needed more regulations[5].

That’s when the so-called “Volcker Rule” started to get bandied about again. Former Federal Reserve Chairman Paul Volcker had been adamantly opposed to allowing banks to take part in speculative investments that do not benefit their customers. The idea is that these risky moves could result in huge losses that topple a financial firm, and ultimately impact consumers who are just trying to pay their gas bill with a check card or take out a mortgage on their first home.

Sound familiar?

Lost in the fact that irresponsible and unscrupulous lending practices nearly bankrupted Bank of America (NYSE:BAC[6]) and Citigroup (NYSE:C[7]) is the broader impact of those mortgages. Consider that investment bank Morgan Stanley (NYSE:MS[8]) lost $3.7 billion[9] at the end of 2007 thanks to trading mortgage-related securities. Not only was Bank of America bleeding cash on its primary lending, but investment banks playing around with derivatives of those mortgages were getting burned.

And despite all that, investment banks and egomaniacal traders like the London Whale continue to play these games — and continue to rack up huge losses.

The most absurd part is that Paul Volcker doesn’t have unanimous support for his regulatory ideas and still has to defend himself[10]. Aren’t the headlines proof enough?

Apparently not. Because just this past February, JPMorgan CEO Jamie Dimon said Volcker “doesn’t understand capital markets.”[11]

One could argue JPM traders don’t have a very good grasp of the situation either, Jamie, after that $2 billion loss.

Think of it this way: Paul Volcker isn’t just advocating a system that protects the broader economy and banking public from the irresponsible behavior of traders. He’s also looking to protect banks from themselves.

I can think of 2 billion reasons why that argument should make sense to investment bankers right now.

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[12] Write him at editor@investorplace??.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the aforementioned securities.

Endnotes:
  1. JPM: http://studio-5.financialcontent.com/investplace/quote?Symbol=JPM
  2. “Only on Wall Street Does Losing $2B Make You an ‘Expert.’”: http://investorplace.com/2011/09/ubs-2-billion-trading-loss/
  3. UBS: http://studio-5.financialcontent.com/investplace/quote?Symbol=UBS
  4. John Corzine losing $1.2 billion: http://investorplace.com/investorpolitics/a-lesson-about-greed-from-mf-global/
  5. to admit the financial services industry needed more regulations: http://investorplace.com/2010/02/volcker-rule-why-wall-street-needs-more-financial-regulation/
  6. BAC: http://studio-5.financialcontent.com/investplace/quote?Symbol=BAC
  7. C: http://studio-5.financialcontent.com/investplace/quote?Symbol=C
  8. MS: http://studio-5.financialcontent.com/investplace/quote?Symbol=MS
  9. lost $3.7 billion: http://www.nytimes.com/2007/11/08/business/08morgan.html
  10. still has to defend himself: http://dealbook.nytimes.com/2012/05/09/volcker-defends-a-rule-bearing-his-name/
  11. JPMorgan CEO Jamie Dimon said Volcker “doesn’t understand capital markets.”: http://investorplace.com/2012/02/jp-morgan-chase-ceo-jamie-dimon-volker-rule/
  12. “The Frugal Investor’s Guide to Finding Great Stocks.”: http://www.amazon.com/dp/B007KB9CSI/ref=rdr_kindle_ext_tmb

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