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JPMorgan Losses: Sens. Levin, Corker Debate Implementing Financial Regulation

Amid a $2 billion trading loss disclosed last week by banking giant JPMorgan Chase and the announcement of a top executive’s retirement Monday, Sens. Carl Levin, D-Mich., and Bob Corker, R-Tenn., speak with Judy Woodruff about calls for more Wall Street reform and the future of implementing Dodd-Frank regulations.

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    We take a second look at the JPMorgan Chase trading mistake and the potential political impact of the company's $2 billion blunder.


    We know that we're better off when there are rules that stop big banks from making bad bets with other people's money.


    Financial regulation was clearly on the president's mind today even during his commencement address at Barnard College in New York. The issue burst back into the spotlight last week after banking giant JPMorgan Chase announced that it lost $2 billion in just six weeks.

    Traveling with the president today, White House Press Secretary Jay Carney said, "This event only reinforces why it was so important to pass Wall Street reform, why it is so important to fully implement Wall Street reform."

    JPMorgan Chase CEO Jamie Dimon has been a leading opponent of new regulations under the Dodd-Frank law. He spoke Sunday on Meet the Press in remarks taped before the bank announced its massive losses.

    JAMIE DIMON, chairman, JPMorgan Chase: I don't like this attitude of just blame everybody. If you think something is wrong, go get those people who did something wrong and blame them.


    The president's Republican challenger, Mitt Romney, argued earlier this month that the regulations will do more harm than good.


    The small community banks are the ones that have been most hurt, because, again, the burden of regulation falls heaviest on the smaller enterprises that don't have the funds and the personnel to follow all the new government regulations.


    Meanwhile, the Obama reelection team is trying to tie Romney to public discontent with Wall Street. A new television ad includes interviews with former employees at a Kansas City steel mill that Romney's private equity firm, Bain Capital, acquired.

  • MAN:

    They made as much money off it as they could. And they closed it down, they filed for bankruptcy without any concern for the families or the communities.

  • MAN:

    It was like a vampire. They came in and sucked the life out of us.


    The Romney campaign answered with a Web video touting Bain's role in bankrolling another steel company, SDI.

  • WOMAN:

    I think there's a lot of pride in what we've built out here.

  • MAN:

    But SDI almost never got started. When others shied away, Mitt Romney's private sector leadership team stepped in.

  • MAN:

    Building a dream with over 6,000 employees today.


    Meanwhile, amid the claims and counterclaims, the two campaigns are avidly competing for funds from Wall Street. According to the Center for Responsive Politics, Mitt Romney has received almost $18 million from the finance, insurance and real estate sector. President Obama has received just under $8 million.

    Four years ago, he raised $42 million in Wall Street contributions.

    For more on the politics of Wall Street reform, we're joined by two U.S. senators. Michigan Democrat Carl Levin leads the Senate subcommittee that investigated the financial crisis. And Tennessee Republican Bob Corker is a member of the Senate Banking Committee.

    Gentlemen, we thank you both.

    And I'm going to start with you, Sen. Levin. Does this $2 billion and maybe bigger loss by JPMorgan point to the need for more government regulations?

  • SEN. CARL LEVIN, D-Mich.:

    We have already adopted the law. It's called Dodd-Frank. We have language in there, which I actually drafted with Sen. Merkley. And so it's very clear in that law that, while you're allowed to hedge, you are not allowed to gamble.

    And the difference between them is that the hedging we specifically allow that banks are permitted to engage in has got to reduce the risk. It's explicit in the law. And what this bank did in this case, by their own data, is not reduce the risk. They were dramatically increasing the risk by their own data.

    That is not permitted by our law. And we hope that the regulators, when they're writing out the regulations to implement the law, will read our law, because we think it's mighty clear.


    Sen. Corker, what about that?

    I mean, this — JPMorgan, considered one of the best-run investment banks in the country, the fact that they made an error of this size, does that point to the need for — for regulation?

  • SEN. BOB CORKER, R-Tenn.:

    Well, as Carl and I were talking coming in, this has happened at an interesting time, because rules are being promulgated. And while I agree with Sen. Levin that the intent of the legislation that was passed was to keep proprietary trading from occurring, I think it's questionable as to whether that's actually what's happened.

    And I think we both were talking coming in this is something we need to have a hearing on and understand. We have been in conversations all weekend with the OCC, the Office of Currency, and that basically over — the examiner in charge that oversees the book of business at JPMorgan, and they have been very adamant that even if the Volcker rule, which the senator was referring to, was fully implemented, that this would have been permitted activity.

    During the course of the day, we were just talking, they have altered their position and said that this is more complex than they thought and they really want to hold off. The New York — the Fed has said the same thing, that this is complex and they really don't know.

    One thing I can say for sure is that I think JPMorgan has been caught off-guard. We have been talking with them for some time since this first — this issue first came there and their position on this has evolved as far as what has happened.

    So what I would say, Judy, is, I agree that prop trading needs to be out the window, but I think it's questionable as to what these trades were really about and were they really trying to mitigate specific risk. There is language in there that talks about aggregate issues. And so I think there's more to understand here and more policy to be developed.


    Well, I know it's easy to get lost in the details of all this.

    But, Sen. Levin, would you agree that the Volcker rule — so-called Volcker rule that limits the kind of trading banks can do might not have prevented this?


    No, we — the law is very clear. And I got it here with me.

    It says that you can mitigate risk. You can reduce risk. But if you're going to use the hedging exception, which we wrote into the rule to proprietary trading, it must be to reduce risk of specific assets.

    These were neither specific. It was the entire portfolio which is at issue here. It was a much larger risk than just a specific asset or a specific position. But even more important, by their own data, they were not reducing risk with these trades. They were increasing risk. And the Comptroller of the Currency assured me this afternoon that they have not reached any conclusion at the current — with that particular agency as to whether or not the rule is clear enough, and they have not reached a conclusion as to what the facts were.

    But I read him the law. There's no lack of clarity about the law. You have got to be reducing risk with these trades. That is not what they were doing.


    Sen. Corker, if the argument that I think you're making is that there's a limit to how much more regulation there should be, better to err on the side of less regulation, what's to stop a bank. . .


    No, actually, I wasn't. . .


    Go ahead.


    I wasn't making that argument.

    What I was saying is that — and I think the senator would agree — that, as the rule has come through, there have been some questions about what it actually means.

    I think he and Sen. Merkley have weighed in. And I think there's a lot of weighing in that's taking place with the Comptroller of the Currency right now. And I think that's impacted things. And so, no, I'm not saying less regulation. What I'm saying is, I think the first thing we need to do, let's understand what happened fully with this transaction.


    Well. . .


    And then let's see if there are policies in place right now that would have mitigated this if it was proprietary trading. And if not, what is it that we should do?

    So, no, I'm an open book on this. And I actually — we were talking coming in, I think this has happened at a very important time in this evolution.


    Well, let me take you then quickly, Sen. Corker, to what Gov. Romney has argued. And that is generally for the dismantling of Dodd-Frank, which is the financial regulatory reform, if he's elected president.

    If one were to carry that out to a situation where a bank like JPMorgan were to continue to do this kind of trading and the bank were to be in much worse shape than this bank is, who's going to bail that bank out? What does this lead to?


    Well, look, in any bill that's 2,400 pages long, there are some redeeming features.

    One of the things that I spent a tremendous amount of time on with Sen. Warner was the resolution authority, where if a bank fails you put them out of business. You have a mechanism to make that happen. So I think there are lots of good provisions.

    This bill began in the very beginning to deal with four very specific pieces of bank regulation. Over time, it became a Christmas tree for all kinds of aspirational goals that were not thought out.

    And I agree with Gov. Romney that this has been devastating to the community banking system in our country. In other words, this was built around Wall Street but the negative effect is really on the community banks all across our nation that are in small communities that help cause them to have economic growth.

    So there's no doubt there's a lot of changes that need to happen in the bill. And I think even Sen. Levin off-camera would agree with me on that.


    I'll disagree with you off-camera and on-camera, as a matter of fact.



    The idea that Gov. Romney would repeal Dodd-Frank is to me the absolute worst outcome we could have here.

    If anything proves the need for regulation of Wall Street, to get the cop back on the beat in Wall Street, it was that recession, where we had banks gambling, making bets, proprietary bets, which put them in a very bad position. And we had no choice but to bail out banks. We never want to have to bail out these big banks again. And that's what the problem is.

    And so you have got to put some regulation in there to control their risky bets. That's what we did in Dodd-Frank. That's what we did with the Volcker rule. That's what we did with Merkley-Levin. And so we want to avoid ever having to bail out banks again. And we better fully implement the language that is in this bill, not water it down under pressure of Wall Street.


    Sen. Levin, just quickly, though, to put a footnote on that, in a situation like this where JPMorgan was using what are apparently highly rated investment grade bonds — that's what they were dealing in — can you write rules that are going to prevent any kind of trading, including in this sort of thing?



    Look, they can do the kind of thing that they did up to the point where they are increasing the risk. You cannot — under this rule — we wrote this rule — you cannot add to the risk and call it hedging. Hedging is reducing risk. There's an exception in our law for hedging.

    The effort has been on the part of Wall Street banks to turn this into a Christmas tree, where you can use that exception to now swamp the rule and do any darned thing you want by calling this an inventory hedge or you're covering your entire group of purchases, which could be thousands and thousands of items.

    You cannot do it. Look, this has been resolved. The president signed this bill. The language is clear in this bill. And we want the regulators not to be persuaded by Wall Street lobbyists that they should write this exception to swamp and override the rule.


    Gentlemen, we have to leave it there. We hope to see you again soon, Sen. Levin, Sen. Corker.


    Thank you.

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