JP Morgan Misled Regulators On Banned Trades, Senate Says

JP Morgan CEO Jamie Dimon

The risky “London Whale” trading loss JP Morgan Chase reported last May was the result of a risky proprietary trade that should be banned by the Volcker Rule, a bipartisan Senate report alleged Thursday. The Volcker Rule would ban most proprietary trading, which is done with a bank’s own money only to turn profit, at financial institutions that have taxpayer backing.

When he announced the loss, which now amounts to more than $6 billion, JP Morgan CEO Jamie Dimon said the trade was a “hedge” and not a prop trade. As such, Dimon said, a stronger Volcker Rule would not have prevented the bank from engaging in the trade. But that was not the case, both Republican and Democratic senators said in the report, as Bloomberg reports:

JPMorgan’s chief investment office increased risk by mislabeling the synthetic portfolio as a risk-reducing hedge when it was really involved in proprietary trading,” said Senator John McCain of Arizona, the panel’s top Republican.

Sen. Carl Levin (D-MI), the Permanent Subcommittee on Investigations’ chairman and a co-author of the Volcker Rule, said the Senate would work to close a loophole in the rule that may allow “portfolio hedges” similar to what JP Morgan attempted. At the time of the loss, Levin said the rule had a loophole wide enough “a Mack truck could drive right through it.”

Many of the loopholes in the rule, which is not yet finalized, may have resulted from JP Morgan’s lobbying. Dimon has been a vocal opponent of the rule, broadly considered the most contentious piece of the Dodd-Frank Wall Street Reform Act, and JP Morgan and other banks lobbied against it both before and after Dodd-Frank passed. A host of former bankers have announced support for the rule and said it was necessary for financial stability, but the rule was watered down significantly, so much so that its namesake, former Federal Reserve chairman Paul Volcker, said he was no longer satisfied with it.

The committee will hold a hearing on the trading loss today. The JP Morgan official who ran the unit that oversaw the massive loss is scheduled to testify.