CFTC probing JPMorgan Chase trading loss
CBS
(CBS/AP) WASHINGTON - The head of the Commodity Futures Trading Commission says the agency has begun an investigation into JPMorgan Chase's (JPM) ill-timed bet on complex financial instruments that led to more than $2 billion in trading losses.
Chairman Gary Gensler says the investigation is "related to credit derivatives products as traded by the chief investment office of JPMorgan Chase." He declined to give any details.
Under the 2010 financial overhaul law, the CFTC gained powers to monitor trading in indexes of derivatives. JPMorgan invested heavily in an index of insurance-like products that protect against default by bond issuers. Hedge funds bet that the index would lose value, forcing JPMorgan to sell investments at a loss. And the FBI has launched a preliminary criminal investigation into the loss at JPMorgan, the biggest U.S. bank by assets.
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Gensler said the loss, which occurred in JPMorgan's operation in London, points up "the risks that can come back here into the U.S. ... The risk crashing back to our shores."
Speaking to reporters after a speech, Gensler said the JPMorgan episode is a fresh reminder of how big financial institutions' operations abroad can magnify risks. The incident weakens industry arguments that regulation should be scaled back, he said.
It was the London-based subsidiary of American International Group Inc. that dealt in the financial contracts that pushed that insurance giant to the brink of collapse in September 2008. The government stepped in with $182 billion in taxpayer aid, the biggest bailout of the financial crisis.
A part of the financial overhaul law, known as the Volcker rule, is designed to prevent banks from placing bets for their own profit. This is known as proprietary trading. The idea is to protect depositors' money, which is insured by the government. If a bank's losses wiped out those deposits, taxpayer money would have to be tapped.
Regulators are finalizing the Volcker rule. JPMorgan CEO Jamie Dimon has been among its most vocal critics. He argues that his firm's trading loss came from a hedging strategy that backfired, not from a bet with the bank's own money.
The big Wall Street banks won an exemption in the rule: It would let them make such trades to hedge not only the risks of individual investments but also the risks of a broader investment portfolio.
Dimon said Monday that JPMorgan is suspending plans to buy back its own stock. He said the bank will continue to pay a dividend despite the trading loss, which he called "an embarrassment" and "a black mark."
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If a strong Volcker Rule with high capital requirements, a narrow "hedging" exception (as sjc suggests), and restictions or prohibitions on trading both naked and synthetic derivatives is strong enough to do the job, great.
If THAT's not enough, then we really DO need to go back to Glass-Steagall, even if that means (as the big banks suggest) that certain kinds of trading leave New York and move to London or Hong Kong or Singapore. We'll just have to let someone else take those risks and earn those profits.
And if THAT's not enough, then we really DO need to break up the too-big-to-fail banks. If they're too big to fail, they're too big to manage, and therefore too big to permit to exist!