A proposal that regulators are said to have considered, but rejected, would have made it clear that the hedging exception applied for trading assets, not long-term investments. They should reverse that decision.
Sheila C. Bair, the former chairwoman of the Federal Deposit Insurance Corporation, points out that some reports have indicated that when the first hedge went awry, JPMorgan concluded that it could not liquidate the position without further damaging its position. So it tried to hedge the hedge. “Why,” she asked, “is that going on in an insured bank? Is this safe and sound?”
The point of the Volcker Rule, named for its principal proponent, Paul A. Volcker, the former chairman of the Federal Reserve, is to leave certain risky activities to those who do not have government-insured deposits and whose failure would not decimate the financial system unless the government stepped up.
To some extent, that used to be accomplished by the Glass-Steagall law, which separated commercial banks from investment banks. That law was repealed by Congress in 1999, but regulators had been whittling away at it for decades. The old law said that a commercial bank could not be affiliated with any firm “engaged principally” in underwriting and trading securities. That seemed to keep brokers away. But the law did not define “engaged principally,” and bank-friendly regulators eventually defined that so narrowly that it was all but meaningless.
It was no surprise that staff members from the Office of the Comptroller of the Currency immediately came to JPMorgan’s defense. The current comptroller, Thomas J. Curry, immediately backed away from the position, saying more information was needed, but the O.C.C., like many another institution, has a basic view of the world that rarely changes, whoever is in charge.
That view was wonderfully summarized back in 2000 when the comptroller’s office put out a working paper explaining why Glass-Steagall deserved to be repealed. The paper said that academic research had shown that the tighter the regulation of banks, the more likely a banking crisis was. The evidence, it said, “should give pause to those who advocate regulatory restrictions on the activities, ownership and organizational forms of U.S. banks.”
It dismissed talk that banks enjoy a major advantage from having deposit insurance. The banks also faced regulatory costs, noted the authors, James R. Barth, now a professor at Auburn University; R. Dan Brumbaugh Jr., a former senior fellow at the Milken Institute; and James A. Wilcox, now a professor at the University of California, Berkeley. “Most evidence suggests,” they wrote, that on balance the costs for the banks were equal to or greater than the benefits they received from having a federal safety net.
None of the major banks would be alive now without that safety net. But the attitude that regulation is a dead-weight burden persists, both in bank boardrooms and in some parts of the regulatory apparatus.
Mr. Curry has been the comptroller only since March. The JPMorgan fiasco should serve as a warning to him that he needs to clean house, and as a warning to other regulators to be vigilant in assuring the Dodd-Frank law is not effectively nullified by the regulations now being written.