How JPMorgan Chase is Thumbing Its Nose at the Volcker Rule

Last Updated Oct 28, 2010 12:53 PM EDT

In the red corner we have the "Volcker rule," a provision in the recently passed Dodd-Frank financial reform law that supposedly curbs Wall Street's appetite for disaster by limiting big banks' ownership of hedge funds. In the blue corner we have new reports like this :
JPMorgan Chase (JPM) is to acquire a $6bn hedge fund run by Brazil's former central bank chief in a move that will deepen the US financial group's exposure to developing markets.
As I wrote last month, and as this acquisition shows, banks are gaming the Volcker rule's limit on firms playing the markets with their own money. As cover, several of these companies have made a show in recent months of putting parts of their so-called proprietary trading businesses on the auction block to feign compliance with Dodd-Frank. Forget it. Author and financial journalist Michael Lewis notes in an insightful piece that "banks have no intention of ceasing their prop trading." He adds:
A former employee of JPMorgan, for instance, wrote to say that the unit he recently worked for, called the Chief Investment Office, advertised itself largely as a hedging operation but was in fact making massive bets with JPMorgan's capital. And it would of course continue to do so.
How are banks are allowed to get away with something that seems to brazenly flout the law? Because Dodd-Frank lets firms continue making bets on, say, mortgage-backed securities or derivatives if they do it on behalf of clients. Trouble is, as Lewis explains, the boundary between banks investing for themselves or for someone else is fuzzy at best:
This ambiguity is no doubt one reason the financial reform bill passed in the first place. Even its clearest prohibitions are couched in language inviting Wall Street to evade them.
Under Dodd-Frank, financial regulators must develop rules that eliminate that ambiguity. But those aren't due until 2012. For now, in other words, such watchdogs couldn't aggressively enforce the Volcker rule even if they wanted to. That leaves plenty of room for the Street to redecorate their prop trading businesses as "client-centric" ones.

Of course, there's a simple way to stop that, and one that would salutary benefit of fundamentally changing Wall Street, Lewis says:
[B]an any sort of position-taking at the giant publicly owned banks. To say, simply: You are no longer allowed to make bets in the same stocks and bonds that you are selling to investors.
Sounds like something Paul Volcker might go for.

Image from Wikimedia Commons, CC 2.0
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