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.

During his nearly three years in the U.S. Senate, Scott Brown (R-MA) frequently came to the aid of the financial sector — watering down the Dodd-Frank bill and working to weaken it after its passage — and accepted hundreds of thousands of dollars in campaign cash from the industry. Now, the man Forbes Magazine called one of “Wall Street’s Favorite Congressmen” will use those connections as counsel for Nixon Peabody, an international law and lobbying firm.

The Boston Globe noted Monday that while Brown himself will not be a lobbyist — Senators may not lobby their former colleagues for the first two years after leaving office, under the Honest Leadership and Open Government Act of 2007 — “he will be leaning heavily on his Washington contacts to drum up business for the firm.” The position will also allow him “to begin cashing in on his contacts with the financial services industry, which he helped oversee in the Senate.”

Among the lobbying clients represented by Nixon Peabody is Goldman Sachs, the Wall Street behemoth that reportedly skirted the Dodd-Frank rules . Brown received $10,000 in PAC contributions from Goldman and more than $100,000 in contributions from its employees.

Brown was also the deciding vote against the DISCLOSE Act, which would have allowed voters to see which moneyed interests were funding secret political ads. The U.S. Chamber of Commerce, which reportedly received millions from Goldman Sachs, led the opposition to the bill.

Last month, Brown joined Fox News Channel as a contributor. In his first appearance in that capacity, he lamented that Congress is “dysfunctional and extremely partisan,” and promised to “stay involved” by being “part of the election process back home and other elections throughout the country.”

Both Democrats and Republicans have raised criticism of the Justice Department’s leniency when it comes to the prosecution of Wall Street banks for their roles in the housing crisis and financial collapse that sparked the Great Recession. But today, Attorney General Eric Holder told the Senate Judiciary Committee that the very size of those banks is what inhibits prosecution, Bloomberg reports:

Criminal charges against a bank — something that could threaten its existence — may also endanger the national or global economies in the case of the largest ones, because of their size and interconnectedness. That has “made it difficult for us to prosecute” some of those institutions, Holder said today at a Senate Judiciary Committee hearing.

“That is a function of the fact that some of these institutions have become too large,” Holder told lawmakers. “It has an inhibiting impact on our ability to bring resolutions that I think would be more appropriate.”

The six largest Wall Street banks have grown exponentially in recent decades and now hold assets worth more than 60 percent of the American economy. But despite widespread fraud, discrimination, and other predatory acts during and after the recent crises, the banks have largely escaped prosecution, drawing the ire of both Democratic and Republican senators.

Ohio Sen. Sherrod Brown (D) and Louisiana Sen. David Vitter (R) renewed their calls to break up banks in Senate speeches last week, and Massachusetts Sen. Elizabeth Warren (D) challenged regulators on the lack of prosecutions in a Banking Committee hearing in February. Brown and Iowa Sen. Chuck Grassley (R) wrote a letter to the Justice Dept. alleging that banks have become “too big to jail,” and Grassley has criticized the banks for having a “get out of jail free” card.

Financial prosecutions reached a 20-year low in 2011, as regulators and the Justice Dept. chose instead to settle claims with large banks over mortgage and foreclosure fraud and other scandals. But those settlements have been rife with problems, as banks have found different ways to game the settlements to their advantage.

Ohio Sen. Sherrod Brown (D) took the Senate floor today to argue against Wall Street mega-banks that have been deemed “too big to fail” and thus receive the implicit backing of the federal government, arguing that lawmakers should act immediately to break up the big banks that now have assets worth more than three-fifths of the American economy.

Wall Street banks sparked the financial crisis in 2008 and were rescued by the federal government. Congress passed the Dodd-Frank Wall Street Reform Act in 2010, but many of its rules have yet to take effect and banks are even bigger today than they were before the crisis. They are also just as scandalous, as financial institutions have faced lawsuits over mortgage and foreclosure fraud, money laundering, interest rate-rigging, and other practices. That, Brown said Thursday, should drive lawmakers to learn from past mistakes and break up the big banks to protect the health of the American economy:

BROWN: In the last five years alone we have seen faulty mortgage-related securities; foreclosure fraud; big losses from risky trading; money laundering; and Libor rate rigging. [...]

How many more scandals will it take before we acknowledge that we can’t rely on regulators to prevent subprime lending, dangerous derivatives, risky proprietary trading, and even fraud and manipulation?

Wall Street has been allowed to run wild for years. We simply cannot wait any longer for regulators to act. These institutions are too big to manage, they are too big to regulate, and they are surely still too big to fail.

Watch it:

Two decades ago, the six largest Wall Street banks held assets worth just 16 percent of the American economy, Brown said. They now hold assets worth more than 60 percent of the total economy:

Brown has emerged as a leading critic of Too Big To Fail in the Senate, and his efforts have attracted bipartisan support. Louisiana Sen. David Vitter (R) joined Brown’s call for action on the Senate floor today, and Iowa Sen. Chuck Grassley (R) has ripped big banks for holding a “get out of jail free card” and, with Brown, has urged the Department of Justice to prosecute large banks for fraudulent practices.

The Volcker Rule — a part of the Dodd-Frank financial reform law that is meant to rein in risky bank trading — is on the verge of being delayed, again, as regulators squabble over its exact parameters. Wall Street banks and congressional Republicans, after successfully watering down the Volcker Rule when Dodd-Frank was being debated, have been trying to get rid of what little bits are left ever since.

But Occupy the SEC, an offshoot of the Occupy Wall Street movement that focuses on matters before government regulatory agencies, is suing the federal government in an attempt to speed up the process and get the Volcker Rule in place. The two plaintiffs in the case claim that their deposits are at risk, so long as banks are allowed to engage in risky gambling with federally backed funds:

Plaintiffs suffer the risk of irreparable injury to their deposits by reason of [the government's] non-action. The Plaintiffs’ bank accounts are subject to potential dissipation or liquidation resulting from bank losses occasioned by excessively risky trading activities by those banks. The Volcker Rule would institute structural safeguards insulating depository accounts from banks’ proprietary trading activities, thereby protecting Plaintiffs’ bank accounts. Defendants’ unjustified delay in finalizing the Volcker Rule puts Plaintiffs’ bank accounts at continued risk of financial loss.

This is the first lawsuit challenging regulators to implement, rather than delay, the Volcker Rule. As Public Citizen’s Bart Naylor wrote, the suit is “making the straightforward case that banks shouldn’t gamble with savings because real people may be harmed.”

Currently, less than half of the rules in Dodd-Frank have been finalized. Wall Street, meanwhile, had its second most profitable year ever last year.

2012 was the second most profitable year in Wall Street’s history, with banks making north of $140 billion. Wall Street’s bonus pool, while not yet back to the heights it achieved before the financial crisis, is growing again, and the average cash bonus hit $121,900.

This is part and parcel of a longer trend on Wall Street, which has seen pay skyrocket as the financial industry was deregulated. According to Bloomberg News, Wall Street’s bonus pool has nearly quintupled since 1985, growing from $4 billion to more than $20 billion (in constant dollars):

Since 1985 the average securities industry bonus in the city has risen about four-fold. There’s a big jump from 1990 to 1991, when bonuses went from about $27,000 in real-dollar terms to $52,000, and a series of further increases from there. Bankers and traders in a bad year now earn much more than they did in a good one. You can see the chart to the right…Meanwhile, the bonus pool has risen in real-dollar terms from $4.1 billion to $20.1 billion.

One pernicious side effect of the near-constant growth in Wall Street bonuses is that regulators make vastly less money than those they are supposed to regulate. As a study in the Quarterly Journal of Economics, over the last few decades, it’s become “impossible for regulators to attract and retain highly skilled financial workers because they could not compete with private sector wages.”

According to the Federal Deposit Insurance Corp., banks in 2012 had their most profitable year since 2006 and their second most profitable year ever. Banks made nearly $35 billion in the fourth quarter of last year, bringing their yearly total to more than $141 billion:

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported aggregate net income of $34.7 billion in the fourth quarter of 2012, a $9.3 billion (36.9 percent) improvement from the $25.3 billion in profits the industry reported in the fourth quarter of 2011. This is the 14th quarter in a row that earnings have registered a year-over-year increase. Increased noninterest income and lower provisions for loan losses continued to account for most of the year-over-year improvement in earnings. For the full year, industry earnings totaled $141.3 billion — a 19.3 percent improvement over 2011 and the second-highest ever reported by the industry after the $145.2 billion earned in 2006.

Wall Street bonuses, while not attaining the same heights to which they rose in 2006, also increased last year. Despite their high profitability, banks are still trying to circumvent or water down the Dodd-Frank financial reform law, claiming that it will undermine their ability to do business. Overall, the financial sector sucks $635 billion out of the economy every year that could be spent on more productive uses.

During a Senate Banking committee hearing on Tuesday, Sen. Elizabeth Warren (D-MA) grilled Federal Reserve Chairman Ben Bernanke on whether Wall Street banks should have to pay back U.S. taxpayers for the implicit funding advantage those banks receive by virtue of being viewed as “too big to fail.” According to a Bloomberg News study, big banks are essentially subsidized by about $83 billion per year because investors anticipate that those banks will be saved by the government if they get in trouble.

“These big financial institutions are getting cheaper borrowing to the tune of $83 billion in a single year simply because people believe the government would step up and bail them out. If they are getting it, why shouldn’t they pay for it?” asked Warren:

WARREN: So I understand that we’re all trying to get to the end of “too big to fail.” But my question, Mr. chairman, is until we do, should those biggest financial institutions be repaying the American taxpayer that $83 billion subsidy that they are getting?…It is working like an insurance policy. Ordinary folks pay for homeowners insurance. Ordinary folks pay for car insurance. And these big financial institutions are getting cheaper borrowing to the tune of $83 billion in a single year simply because people believe that the government would step in and bail them out. And I’m just saying, if they are getting it, why shouldn’t they pay for it?

BERNANKE: I think we should get rid of it.

Watch it:

As Bloomberg found, the biggest banks wouldn’t even be profitable without the expectation that they would be rescued by the government. “The banks occupying the commanding heights of the U.S. financial industry — with almost $9 trillion in assets, more than half the size of the U.S. economy — would just about break even in the absence of corporate welfare. In large part, the profits they report are essentially transfers from taxpayers to their shareholders,” Bloomberg noted.

Wells Fargo is the latest bank to ramp up new forms of risky trading in advance of the Volcker Rule, a regulation included in the 2010 Dodd-Frank Wall Street Reform Act meant to make banks safer by prohibiting certain types of trades that helped trigger the global financial crisis in 2009. The rule bans proprietary trading, in which banks bet their own money for the sole purpose of turning large profits, at financial institutions that have the backing of taxpayers.

While some banks have done away with such trading, Wells Fargo is increasing it by relying solely on its own funds to invest in private equity markets, a practice known as “merchant banking” that will likely be allowed by the finalized Volcker Rule. That sort of banking, however, may turn out to be even more dangerous than the prop trading the Volcker Rule prohibits, Reuters reports:

Their decisions may run counter to rulemakers’ efforts to make the financial system safer. The merchant banking that Wells Fargo is embracing is riskier than investing in private equity funds with outside investors, where a bank shares any losses with others. Some critics warn that the Volcker Rule is banning the safer of the two activities, and allowing the one that could lead to bigger losses for a bank.

Some argue that banks should be blocked from any form of private equity investing. Sheila Bair, the former chairman of the Federal Deposit Insurance Corp, which guarantees the deposits of banks like Wells Fargo, said private equity and merchant banking are too far removed from regular banking.

“Is that really what you want institutions that have safety net support doing? Is that an appropriate use for a government backstop?” she told Reuters.

Wells Fargo’s quest for profits even through risky means is yet another indication that many Wall Street banks, undeterred by the financial collapse, are seeking any loophole they can find to continue raking in huge profits regardless of the potential cost. In January, Bloomberg reported that Goldman Sachs had set up a secret hedge fund-like entity meant to skirt the Volcker Rule, and banks have been fighting to weaken the rule since before Dodd-Frank became law. Those efforts have continued since, even in the face of the stunning JP Morgan Chase trading loss that prompted Senate Democrats to call for the closure of massive loophole that exists in the draft version of the rule.

Former bank executives, however, have made the case that a strong Volcker Rule is “necessary to correct a mistake that poses a major risk to our economy.” And while a forceful Volcker Rule would indeed make large banks less profitable, it would do so in a way that would also ensure that they pose less of a risk to the health of the American economy.

Massachusetts Sen. Elizabeth Warren (D) used her debut on the Senate Banking Committee to question financial regulators about the lack of accountability for Wall Street banks’ role in the financial crisis, challenging them to name the last time a Wall Street bank was taken to trial over allegations of fraud and other crimes instead of being allowed to settle out of court.

“What I’d like to know is, tell me a little bit about the last few times you’ve taken the biggest financial institutions on Wall Street all the way to a trial,” Warren asked the regulators. But none provided a specific answer. That led Warren to wonder if Wall Street banks had become “too big for trial”:

WARREN: I just want to note on this: there are district attorneys and U.S. Attorneys who are out there every day squeezing ordinary citizens on sometimes very thin grounds and taking them to trial in order to make an example, as they put it. I’m really concerned that “too big to fail” has become “too big for trial.”

Watch it (at 3:50):

Prosecution of financial fraud hit a 20-year low in 2011, even amid broad findings of fraud that took place at the biggest banks. The government has instead reached settlements over mortgage and foreclosure fraud, and other alleged crimes with a multitude of banks, and while those settlements are significant, they have also been plagued with problems. And as Warren noted, settling out of court has also prevented the public from “days of testimony” from banking officials that would result from trials.

Though Warren came to the Senate with a reputation for being tough on banks, she is hardly alone in her criticism of the lack of legal action that has been taken against them. Iowa Sen. Chuck Grassley (R-IA) blasted the “get-out-of-jail-free card” the banks seem to hold, and he and Sen. Sherrod Brown (D-OH) petitioned the Justice Department last month over concerns that big banks had become “too big to jail.”