April 05, 2013
Bankrolling the Dismantling of the Volcker Rule
by Robert Kropp
Despite a Senate report finding that JPMorgan's London Whale losses would have been prohibited by
the Volcker Rule, members of a House Committee take bank contributions and vote to advance a bill
that would allow taxpayer bailouts of too big to fail banks.
When Occupy the SEC (OSEC) sued federal
regulators over their failure to enact the Volcker Rule as mandated by Dodd-Frank, the group
stated, "The longer the agencies delay in finalizing the Rule, the longer that banks can continue
to gamble with depositors' money and virtually interest-free loans from the Federal Reserve's
Named after former Federal Reserve Chairman Paul Volcker, the
Volcker Rule places restrictions on proprietary trading by banks as well as investment by them in
private equity firms and hedge funds. The rule does not prohibit banks from engaging in such
activities, but prevents them from doing so with federally insured deposits.
post-reform vacuum created by the failure of regulators to enact the Volcker Rule, too big to fail
banks carry on as if the financial crisis and its enduring aftermath never happened. JPMorgan Chase
is the largest financial institution in the US; last year, in the now-infamous London Whale
episode, the bank lost at least $6.2 billion in what the Senate's Permanent Subcommittee on
Investigations described in a report released last month as "a
massive bet on a complex set of synthetic credit derivatives."
Furthermore, the report
reveals, "misstatements and omissions about…its supposed consistency with the Volcker Rule,
misinformed investors, regulators, and the public about the nature, activities, and riskiness of
the CIO’s credit derivatives."
In an analysis of the Senate report of the report,
Americans for Financial Reform (AFR) concluded that JPMorgan's "traders were using depositors'
money – and taxpayer subsidies – to gamble for their own and the company's profit. That is exactly
what the Volcker rule prohibits."
"Oversight agencies must follow through with writing a
strong Volcker rule, bringing the derivatives markets under effective control, and completing the
rest of the Dodd-Frank agenda," AFR stated. "Elected officials should be trying to protect
regulators from industry bullying, not joining Wall Street in ganging up on them for trying to do
Instead, elected officials are joining Wall Street in an effort to advance
legislation that would, according to AFR, "expressly allow bailouts of our largest banks on Wall
In a letter opposing passage of HR 992, which would allow banks to keep risky
derivatives in depositories and thus qualify banks for taxpayer-funded bailouts in cases such as
the London Whale, AFR wrote, "At a time when there is bipartisan agreement that subsidies to
too-big-to-fail banks must end, this legislation moves in exactly the wrong direction."
Nevertheless, the House Agriculture Committee recently voted in favor of the bill. "Practically
every improper and illegal action that JPMorgan Chase took in the London Whale debacle would be
either made legal or allowed to foster outside of regulatory oversight," David Dayen reported at
"Innovation. Complexity. Liquidity," wrote Bartlett Naylor of Public Citizen. "You, too, can be a successful Wall Street
lobbyist simply by using these three words randomly in conversations. In Washington, deploy these
words in any debate about financial reform and win."
Sometimes it seems as if outfoxing
the intellectual capabilities of Congressmen is all it takes, but money helps too. An analysis by
MapLight of the votes in favor of HR 992 reveals
that Committee members voting in favor of the bill received, on average, 7.8 times as much money
from the four largest commercial banks—Bank of America, Goldman Sachs, Citigroup, and, yes,
JPMorgan Chase—as did those who voted against it.
The four banks, Maplight reports,
"collectively hold 93.2% ($208 trillion in notional value) of all derivatives contracts."
Speaking in 2011 of the challenges investors face, Lisa Woll, CEO of US SIF: The Forum for Sustainable and Responsible Investment,
observed that shareowners can spend decades getting corporations to change their behaviors; "or we
could get a bill that addresses it," she said.
With many members of Congress seemingly
intent on dismantling the financial reform measures that were strongly supported by sustainable
investors, the hard work of shareowners continue. This year, the American Federation of State,
County & Municipal Employees (AFSCME) refiled a resolution at JPMorgan that gained an impressive
40% of shareowner support last year.
The resolution calls for the separation of the
positions of Chair and CEO, an increasingly accepted measure of good corporate governance. At
JPMorgan, both positions are held by Jamie Dimon, who in a quarterly call with analysts last April
as the London Whale losses were coming to light, called them "a tempest in a teapot."
"Wall Street greed and conflicts of interest drove our economy into a ditch," AFSCME President
Gerald McEntee said. "The stakes are too high to leave Jamie Dimon unsupervised. Dimon denied that
the 'London Whale' was making risky bets, and now that this has turned out to be a fish story,
shareholders need to step in."
JPMorgan's board has recommended that shareowners vote
against the proposal. Today's New York Times reported that board members are "working behind the
scenes to avert a major potential embarrassment" with an "unusually proactive" campaign to convince
shareowners to vote in favor of Dimon retaining both positions.