Stephen Foley: At a stroke, Jamie Dimon has become Exhibit A in the case for regulation

 

US Outlook Whatever Jamie Dimon says, JPMorgan Chase's employees don't think the Volcker Rule is a waste of time. The company's chief executive has mocked and mocked and mocked the new rule that bans proprietary trading in Wall Street banks – which is why he is so angry with himself for failing to spot that his own proprietary traders had put on a bet which could blow a $4bn hole in JPMorgan's profits.

At a stroke, when the first losses were announced, Mr Dimon went from being Wall Street's most effective advocate for watering down Volcker to being Exhibit A in the case for regulation.

How seriously now are we to take his 38-page letter to shareholders in which he assails the costs of new regulations in general, and the "mind-numbing complexity" of the "impossible to implement" Volcker Rule in particular?

Mr Dimon is on record saying Paul Volcker, a former chairman of the Federal Reserve and first proponent of banning prop trading, "doesn't understand capital markets" and that implementing the rule will require every trader to be accompanied by "a lawyer, compliance officer, doctor to see what their testosterone levels are, and a shrink asking 'What's your intent?'"

I'm no fan, actually, of the Volcker Rule, which I view as largely irrelevant to fixing the causes of the credit crisis, for reasons I have set out here before. It is absolutely as complex as Mr Dimon suggests, and it has to be so. In order to ban prop trading, you first have to define it, and when you try, you are immediately in the weeds.

Banks make markets. Every trade they make involves holding some assets on their balance sheet for some period of time. We want our banks to make profits and to hedge any big risks on their balance sheets. There is no clear line separating acceptable holdings and hedges from unacceptable "prop trading". It does indeed turn on what is the "intent" of a bank's trading position.

Regulators are not proposing the introduction of doctors and psychologists, though. Instead, they have approached the unenviable task of defining prop trading mathematically. They are requiring banks to build new systems for collecting data on more than a dozen metrics, on issues like how long they hold assets and on which type of clients these assets are traded with.

And here's the surprising thing. Within JPMorgan, this is not a universally hated exercise. In fact, some people are feeling downright positive about it. Diane Genova, general counsel of JPMorgan Chase's investment bank, speaking at the International Swaps and Derivatives Association conference earlier this month, called the proposed metrics "a really good effort" to define prop trading, and she went on: "We would probably use these anyway as risk management tools. Getting ready to implement these would not be a waste of time."

The reason nobody can tell you whether the London Whale's disastrous trading at JPMorgan would have been banned by the Volcker Rule is because no one quite knows what will come out of this black box of mathematical calculations under Volcker.

Modern capital markets are complex places, like it or not, and they require complex regulation. If Jamie Dimon believes the Volcker Rule is too complex to implement, it follows that his bank is too complex, too.

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