The Obama administration will likely tighten rules to prevent federally insured banks from speculating with their money after financial giant JP Morgan lost billions of dollars — and continues to hemorrhage — on a risky bet intended to pad the firm’s profits.
The acknowledgment by a senior administration official Monday threatens to reopen a protracted fight between Wall Street allies and the White House over imposing new rules on big financial companies in the wake of the 2008 crisis.
The administration hasn’t specified any particular steps it would like regulators to take to shore up the so-called Volcker Rule — a bid perhaps to avoid an ugly public fight with powerful interests in an election year. But inaction — or a too-tepid response to JP Morgan’s losses — will hurt President Obama with key allies, who want to use the debacle to further rein in Wall Street.
“We will want to use this real-life example as something that will help instruct, help inform, how the ultimate contours of the Volcker ruler come out—make sure that it is strong,” a senior administration official told reporters.
The announcement came hours after Chamber of Commerce CEO Tom Donohue criticized the Volcker Rule and pressed the administration not to use the incident to impose new, harsher regulations.
“Nobody’s clear about the Volcker Rule,” Donohue told reporters. “It’s 270 some pages and if you gave it to six experts on the subject, they’d come back with seven interpretations of what it means…. My own view is to suggest that we wait and see what happens.”
Waiting in this case could throw the game. The Volcker Rule is set to be finalized in July, and absent an extension, or quick work to address loopholes in the language, the final version will, by some analyses, allow banks to make broad bets similar to the one that landed JP Morgan in so much trouble.
The legislative authors of the Volcker Rule — Sens. Jeff Merkley (D-OR) and Carl Levin (D-MI) — are well aware of this, and have been pushing for swift action to bring the regulations in line with the clear intent of the law.
These factions are pulling the administration in opposite directions. But if the Volcker Rule isn’t significantly tightened, and the consequence of the JP Morgan losses amounts to a slap on the wrist, it’ll drive a wedge between Obama and many in his own party who back tougher reforms.
“I am pleased to hear the Administration is joining a growing chorus of supporters in the effort to strengthen the Volcker firewall between traditional banking and hedge fund-style bets,” Merkley said in a statement to TPM. “As losses continue to mount on the failed trades by JP Morgan, it is clear that hiding such bets in so-called risk management and other divisions is unacceptable. I look forward to working with the President and the relevant agencies to close the JP Morgan loophole and to ensure final rulemaking on the Volcker firewall has clear, bright lines.”
Brian Beutler is TPM's senior congressional reporter. Since 2009, he's led coverage of health care reform, Wall Street reform, taxes, the GOP budget, the government shutdown fight, and the debt limit fight. He can be reached at firstname.lastname@example.org.