Sunday, May 13, 2012

Volcker Rule

JP Morgan Fought for Loophole
The first rule of gambling is to know when to fold ’em. But after the creation of the Volcker Rule, a regulatory law meant to prevent overly risky trading, JPMorgan Chase sent a lobbyist to Washington to argue for loopholes that would allow for trades much like those that led to a $2 billion loss announced by the bank on Friday. Bank chief executive Jamie Dimon and other members of upper management paid regular visits to lawmakers to argue that, while they thought some parts of the rule were useful, others would hurt the bank’s ability to hedge against risk. The result, said Senator Carl Levin, was a “big enough loophole that a Mack truck could drive right through it.”
Read more at The New York Times.

The Volcker Rule says that since a functioning commercial banking system is essential to the stability of the entire financial system, banks that engage in high-risk speculation create an unacceptable level of systemic risk. The proposal specifically prohibits a bank or institution that owns a bank from engaging in proprietary trading that is not at the behest of its clients, and from owning or investing in a hedge fund or private equity fund, as well as limiting the liabilities that the largest banks could hold. See Wikipedia.

On January 21, 2010, under the same initiative, President Obama announced his intention to end the mentality of "Too big to fail." He got that one right. The Volcker Rule is to be implemented on July 21, 2012 as part of Dodd-Frank that became law in July 2010.

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