SEC Reviews JPMorgan Filings After $2B Loss
May 23, 2012 (USA TODAY) Proposed new financial rules could have mitigated risks related to JPMorgan Chase's more than $2 billion loss, but it's unclear whether they would have prevented the trading that led to the blunder, the Securities and Exchange Commission's head told Congress Tuesday.
The testimony of SEC Chairman Mary Schapiro and that of another key financial regulator underscored that even the Dodd-Frank Act, the sweeping financial reform passed by Congress in 2010, might not be robust enough to head off the types of big trading losses that led to the financial crisis almost four years ago.
JPMorgan's loss wasn't nearly as damaging, but it has provided ammunition to financial reform proponents just as large banks, including JPMorgan, are trying to weaken key provisions of the legislation or slow its implementation.
The JPMorgan episode "gives us real, live experience," Gary Gensler, chairman of the Commodity Futures Trading Commission, told the Senate Banking Committee. He testified along with Schapiro.
JPMorgan announced on May 10 that it had lost at least $2 billion in trading on complex securities known as credit-default swaps, designed to hedge risks in its corporate bond portfolio.
Schapiro said the SEC is investigating whether the bank disclosed the loss in a timely way and its financial reports were truthful. She added that "the SEC did not have direct oversight" of the trading, in part because it was handled by JPMorgan's London subsidiary.
Gensler, whose agency is also investigating the bank's trading loss, noted the new financial rules would give regulators more authority over the trading of various kinds of swaps.
Also, such products would have to be traded over public exchanges and clearinghouses. Banks would have to post sufficient collateral, and regulators and other investors could better monitor price movements.
But it's unclear if the so-called Volcker rule, which would prohibit firms from making risky trades with their own money to increase profits, would have prevented JPMorgan's loss if it had been in effect. That's because the Volcker rule lets banks make such trades to hedge certain risks or establish market prices. It's scheduled to take effect in July, but institutions covered by the rule will have two years to meet its requirements.
"This is one of the more challenging tasks that the regulators have been given," Gensler said, adding that the distinction between proprietary trading, hedging and market-making is fuzzy. "They do overlap."
Schapiro noted a hedge must mitigate a specific risk of a security or an aggregate position of securities, among other criteria. Still, she said, "I don't think we have a view yet," on whether JPMorgan's trades met those standards.
JPMorgan CEO Jamie Dimon has said trades that caused the loss would not have been barred by the Volcker rule.
Some Republican committee members said the new rules would require government officials to micromanage the trades of large banks. Instead, they suggested, the government should require banks to have more capital to cover losses.
"Then let them live with the consequences," said Sen. Patrick Toomey, R-Pa.