JPMorgan's loss highlights loophole in rule

Bloomberg News

WASHINGTON - A Senate panel probing the multibillion-dollar trading loss by JPMorgan Chase plans to unveil its findings at a hearing this year to press regulators to tighten the Volcker rule, according to three people briefed on the matter.

Staff members of the Permanent Subcommittee on Investigations, headed by Sen. Carl Levin, D-Mich., have interviewed JPMorgan officials as well as examiners and supervisors at the institution's regulator, the Office of the Comptroller of the Currency, said the people, who spoke on condition of anonymity because the inquiry isn't public.

One focus of the queries is whether JPMorgan's wrong-way bets on derivatives would have been permitted under regulators' initial draft of the Volcker ban on proprietary trading, the people said. The lender lost $5.8 billion on the trades in the first six months of the year.

Levin and Sen. Jeff Merkley, D-Ore., inserted the trading ban into the 2010 Dodd-Frank Act, leaving the details largely up to regulators. The senators have said that the JPMorgan loss highlights a loophole in the regulators' draft that would allow banks to continue hedging their portfolio risks, and they said it should be closed.

Levin "has pride of authorship in the Volcker rule and wants to make sure it's implemented correctly," said Joseph Engelhard, senior vice president of Washington-based investment advisory firm Capital Alpha Partners.

The panel's investigators have interviewed OCC officials including Scott Waterhouse, the examiner-in-charge for JPMorgan, and Julie Williams, the agency's chief counsel, and plan to meet with Comptroller Thomas J. Curry, according to two of the people. Bloomberg News reported Sept. 7 that the committee also has sought testimony from those who worked in or helped lead JPMorgan's chief investment office.

No hearing date has been set and the committee hasn't settled on who will be summoned from the regulatory agency or the bank, the people said.

After the bank disclosed its losses May 10, Levin and Merkley sent a letter to five federal regulators urging them to remove "ill-advised loopholes" from the Volcker draft issued in October 2011.

"Last fall's proposed rule ignored the clear legislative language and clear statement of congressional intent and allowed for so-called 'portfolio hedging,' " the lawmakers wrote on May 17. "Now, in recent days, we've seen exactly what 'portfolio hedging' might mean. This 'JPMorgan Loophole' is big enough to drive a 'London Whale' through."

The letter referred to Bruno Iksil, the French-born trader in London who ran JPMorgan's credit-derivatives book and came to be known as the London Whale because of the size of his bets.

In June, the Senate Banking and House Financial Services committees held hearings on the trading loss that touched on the effect of the Volcker rule. JPMorgan Chief Executive Officer Jamie Dimon, who testified before both panels, said the rule might have prevented the trades.

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