JPMorgan Used Political Influence With Fed and Treasury to Create London Loss Loophole In Volcker Rule

"It is impossible to calculate the moral mischief, if I may so express it, that mental lying has produced in society. When a man has so far corrupted and prostituted the chastity of his mind as to subscribe his professional belief to things he does not believe, he has prepared himself for the commission of every other crime."

Thomas Paine

Using political influence with the Fed and the Treasury, JP Morgan overrode concerns at the SEC and CFTC to create a broad loophole in the Volcker Rule which was designed to allow them to continue risky and highly leveraged 'prop trading' in their CIO unit under the phony rationale of 'portfolio hedging.'   This is the backstory on the antics of the 'London Whale' and quite likely their rationale of 'hedging' to justify enormous and manipulative positions in other markets.

Throughout the lead up to the financial crisis, banking lobbyists used their friends at the Fed and the Treasury to suppress the warnings of regulators and undermine reforms to protect the public interest.

One of the most infamous instances was the bullying of Brooksley Born and the silencing of her warning as chairman of the CFTC by Alan Greenspan, Robert Rubin, and Larry Summers.   PBS Frontline: The Warning.

This crony capitalism is one of the reasons why the financial system collapsed, and why the markets are still so dangerously unstable, despite the determined efforts to disguise it with liquidity and lax regulation. The responsibility for this goes back to the Clinton and Bush Administrations at least.

Obama was elected with a mandate to reform, but instead packed his Administration with Wall Street figures. He has one of the worst records for pursuing financial frauds in the last twenty years.

It is time to stop apologizing for and tolerating the soft corruption that has characterized the Obama Administration's policy on the financial sector since day one. The price of giving him a pass on this failure to do his job and making excuses for him is too high.    The excuse that Romney will be worse is not acceptable.

The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustained growth and recovery.

NY Times
JPMorgan Sought Loophole on Risky Trading
By Edward Wyatt
May 12, 2012

WASHINGTON — Soon after lawmakers finished work on the nation’s new financial regulatory law, a team of JPMorgan Chase lobbyists descended on Washington. Their goal was to obtain special breaks that would allow banks to make big bets in their portfolios, including some of the types of trading that led to the $2 billion loss now rocking the bank.

Several visits over months by the bank’s well-connected chief executive, Jamie Dimon, and his top aides were aimed at persuading regulators to create a loophole in the law, known as the Volcker Rule. The rule was designed by Congress to limit the very kind of proprietary trading that JPMorgan was seeking.

Even after the official draft of the Volcker Rule regulations was released last October, JPMorgan and other banks continued their full-court press to avoid limits.

In early February, a group of JPMorgan executives met with Federal Reserve officials and warned that anything but a loose interpretation of the trading ban would hurt the bank’s hedging activities, according to a person with knowledge of the meeting. In the past, the bank argued that it needed to hedge risk stemming from its large retail banking business, but it has also said that it supported portions of the Volcker Rule.

In the February meeting was Ina Drew, the head of JPMorgan’s chief investment office, the unit that suffered the $2 billion loss...

JPMorgan wasn’t the only large institution making a special plea, but it stood out because of Mr. Dimon’s prominence as a skilled Washington operator and because of his bank’s nearly unblemished record during the financial crisis.

“JPMorgan was the one that made the strongest arguments to allow hedging, and specifically to allow this type of portfolio hedging,” said a former Treasury official who was present during the Dodd-Frank debates.

Those efforts produced “a big enough loophole that a Mack truck could drive right through it,” Senator Carl Levin, the Michigan Democrat who co-wrote the legislation that led to the Volcker Rule, said Friday after the disclosure of the JPMorgan loss.

The loophole is known as portfolio hedging, a strategy that essentially allows banks to view an investment portfolio as a whole and take actions to offset the risks of the entire portfolio. That contrasts with the traditional definition of hedging, which matches an individual security or trading position with an inversely related investment — so when one goes up, the other goes down.

Portfolio hedging “is a license to do pretty much anything,” Mr. Levin said. He and Senator Jeff Merkley, an Oregon Democrat who worked on the law with Mr. Levin, sent a letter to regulators in February, making clear that hedging on that scale was not their intention.

“There is no statutory basis to support the proposed portfolio hedging language,” they wrote, “nor is there anything in the legislative history to suggest that it should be allowed.”

While the banks lobbied furiously, they were in some ways pushing on an open door. Officials at the Treasury Department and the Federal Reserve, the main overseer of the banks, as well as the Comptroller of the Currency, also wanted a loose set of restrictions, according to people who took part in the drafting of the Volcker Rule who spoke on the condition of anonymity because no regulatory agencies would officially talk about the rule on Friday.

The Fed and the Treasury’s views prevailed in the face of opposition from both the Securities and Exchange Commission and the Commodity Futures Trading Commission, which regulate markets and companies’ reporting of their financial positions. Both commissions and the Federal Deposit Insurance Corporation, which insures bank deposits, pushed for tighter restrictions, the people said...

Read the rest here.

Gold Daily and Silver Weekly Charts - Facebook Cometh, So Paper Prevails

More capping pressure on the metals today. With Open Interest holding steady and the accumulation patterns intact it seems more like short selling to hold down price. That can only last for so long, and is the stuff of V bottoms.

The Facebook IPO prices next Thursday and that is a 'big event' for the Street.

But let's see how Europe fares. Liquidity panics are painful in the short term. I do not favor any stocks for now, and maintain gold bullion positions with hedges. As always I do not touch any long term positions.

I have posted the Comex option dates below for the next few months. This is traditionally a heavy delivery period for the next two months, so let's keep an eye on how that goes. These low prices might be considered a gift for those seeking physical bullion.

As the swallows return to San Juan Capistrano, so the children, or I should say young men and women now, return from university and their far flung enterprises this evening.

And so the old man must take his early leave, and make preparations for their return, and especially the return of their hearty appetites.

Have a pleasant weekend.

May 24 Comex June gold options expiry
May 24 Comex June copper options expiry
May 26 Comex June miNY gold futures last trading day
May 29 Comex May silver futures last trading day
May 29 Comex May copper futures last trading day
May 29 Comex June E-mini copper futures last trading day
May 29 Comex June miNY gold futures last trading day
May 31 Comex June gold futures first notice day
May 31 Comex June copper futures first notice day
May 31 Nymex June palladium futures first notice day
June 26 Comex July silver options expiry
June 26 Comex July copper options expiry
June 26 Comex July silver futures last trading day
June 27 Comex June gold futures last trading day
June 27 Comex June copper futures last trading day
June 27 Comex June E-micro gold futures last trading day
June 27 Comex July E-mini copper futures last trading day
June 27 Comex July miNY silver futures last trading day
June 27 Nymex June palladium futures last trading day
June 29 Comex July silver futures first notice day
June 29 Comex July copper futures first notice day
June 29 Nymex July platinum futures first notice day

SP 500 and NDX Futures Daily Charts - The Facebook IPO Cometh

JPM dropped a bit of a bombshell last night, as the great Jamie Dimon confessed the losses at their London based CIO 'hedging operation.'

I had to chuckle today as the Street mavens attempted to direct and deflect that event, so as not to interfere with the much awaited Facebook public offering is expected to be priced next Thursday, May 17th.

I expect that the Street will rally to the support of the major indices in order to hold up demand for this fat cow of an IPO.

I imagine that it will price to expectations, or possibly just below, but obtain a decent initial performance based on nothing else than pure price manipulation and a shortage of shares for borrowing.

And then I think it will be cut in half, perhaps over a period of weeks. But it depends quite a bit on what else is happening in the macro world, particularly with regard to European debt and the next round of US quantitative easing, no matter the paper in which they choose to wrap it. Liquidity floats even dead fish.

Our son is coming home from university this evening, and a godson is coming here on a two week leave from the military, so I must make preparations for their hearty appetites. I have missed them greatly and will be very happy to see them. Children can be a worry and a heartache yes, I know that well, but also a great consolation and joy to a world weary heart.

Have a pleasant weekend.

JP Morgan Failure Shows the Incompetency of the Fed As Regulator And a Corrupted Government

...And They Repeatedly Fail to Protect the Public From It.

"How can we expect righteousness to prevail when there is hardly anyone willing to stand up for a righteous cause?

Such a fine, sunny day, and I have to go..."

Sophie Scholl, last words

The spin machine is revving up, and the spokesmodels are gesticulating wildly, in an effort to direct and deflect this failure of governance at JPM.

See how manfully Jamie Dimon has come clean on this. And look how well the Fed's capital standards are protecting us from a failure at JPM because of this unfortunate but 'manageable' trading mistake.  

Jamie and the regulators could not possibly have known (CEO defense) what was going on in their firm because the world is now so complex.  They will try and work harder so don't disturb them or bad things will happen to us and it will be your fault.  But this will be a buying opportunity!

A craven Congress, dominated by a hard core of one-percenter bully boys, an Obama Administration intimately tied to Wall St. cronies, and the Federal Reserve, which is a private institution of financial establishment insiders making a weak attempt at self-regulation cloaked in secrecy, have failed the public once again.

Simon Johnson points out what many may miss in all this. The side effects of the continuing campaign by the banks' lobbyists to weaken reform have given us a hint of the next financial crisis to come which will be caused by a collapse in the derivatives market. And who could have seen it coming.

And I would like to make the point, and nail it to the door of the spineless media, that JPM had to admit, while the position was still open, that their 'hedge' had blown up in their faces, and that it was no hedge at all, but a thinly disguised attempt to circumvent the curbs on proprietary trading.  More simply, they were preparing to flout the law and were brazenly lying about it, and their use of leverage and very risky bets in search of enormous bonuses.  And they are doing the same thing on a much larger scale in other markets.

And it is no coincidence that financial fraud prosecutions under the Obama Administration are at a twenty year low, and the media and even his political opposition say almost nothing about it.

"All governments suffer a recurring problem: Power attracts pathological personalities. It is not that power corrupts but that it is magnetic to the corruptible."

Frank Herbert

The credibility trap has captured our leadership. They cannot change course without admitting their failures, and to admit their failures is to weaken or even lose their grip on power. And so it's steady as she goes, onto the rocks. Better a general than a personal failure, risking other people's lives to protect your gains, because there is opportunity in a crisis as long as you still have a seat in the game.

The cheating, stealing, and lying will continue until the system finally collapses, or until the people finally wake up, take responsibility for their government, and demand meaningful reform.

JP Morgan Debacle Reveals Fatal Flaw In Federal Reserve Thinking
By Simon Johnson
May 11, 2012

Experienced Wall Street executives and traders concede, in private, that Bank of America is not well run and that Citigroup has long been a recipe for disaster. But they always insist that attempts to re-regulate Wall Street are misguided because risk-management has become more sophisticated – everyone, in this view, has become more like Jamie Dimon, head of JP Morgan Chase, with his legendary attention to detail and concern about quantifying the downside.

In the light of JP Morgan’s stunning losses on derivatives, announced yesterday but with the full scope of total potential losses still not yet clear (and not yet determined), Jamie Dimon and his company do not look like any kind of appealing role model. But the real losers in this turn of events are the Board of Governors of the Federal Reserve System and the New York Fed, whose approach to bank capital is now demonstrated to be deeply flawed.


JP Morgan claimed to have great risk management systems – and these are widely regarded as the best on Wall Street. But what does the “best on Wall Street” mean when bank executives and key employees have an incentive to make and misrepresent big bets – they are compensated based on return on equity, unadjusted for risk? Bank executives get the upside and the downside falls on everyone else – this is what it means to be “too big to fail” in modern America.

The Federal Reserve knows this, of course – it is stuffed full of smart people. Its leadership, including Chairman Ben Bernanke, Dan Tarullo (lead governor for overseeing bank capital rules), and Bill Dudley (president of the New York Fed) are all well aware that bankers want to reduce equity levels and run a more highly leveraged business (i.e., more debt relative to equity). To prevent this from occurring in an egregious manner, the Fed now runs regular “stress tests” to assess how much banks could lose – and therefore how much of a buffer they need in the form of shareholder equity.

In the spring, JP Morgan passed the latest Fed stress tests with flying colors. The Fed agreed to let JP Morgan increase its dividend and buy back shares (both of which reduce the value of shareholder equity on the books of the bank). Jamie Dimon received an official seal of approval. (Amazingly, Mr. Dimon indicated in his conference call on Thursday that the buybacks will continue; surely the Fed will step in to prevent this until the relevant losses have been capped.)

There was no hint in the stress tests that JP Morgan could be facing these kinds of potential losses. We still do not know the exact source of this disaster, but it appears to involve credit derivatives – and some reports point directly to credit default swaps (i.e., a form of insurance policy sold against losses in various kinds of debt.) Presumably there are problems with illiquid securities for which prices have fallen due to recent pressures in some markets and the general “risk-off” attitude – meaning that many investors prefer to reduce leverage and avoid high-yield/high-risk assets.

But global stress levels are not particularly high at present – certainly not compared to what they will be if the euro situation continues to spiral out of control. We are not at the end of a big global credit boom – we are still trying to recover from the last calamity. For JP Morgan to have incurred such losses at such a relatively mild part of the credit cycle is simply stunning.

The lessons from JP Morgan’s losses are simple. Such banks have become too large and complex for management to control what is going on. The breakdown in internal governance is profound. The breakdown in external corporate governance is also complete — in any other industry, when faced with large losses incurred in such a haphazard way and under his direct personal supervision, the CEO would resign. No doubt Jamie Dimon will remain in place.

And the regulators also have no idea about what is going on. Attempts to oversee these banks in a sophisticated and nuanced way are not working.

The SAFE Banking Act, re-introduced by Senator Sherrod Brown on Wednesday, exactly hits the nail on the head. The discussion he instigated at the Senate Banking Committee hearing on Wednesday can only be described as prescient. Thought leaders such as Sheila Bair, Richard Fisher, and Tom Hoenig have been right all along about “too big to fail” banks (see my piece from the NYT.com on Thursday on SAFE and the growing consensus behind it).

The Financial Services Roundtable, in contrast, is spouting nonsense – they can only feel deeply embarrassed today. Continued opposition to the Volcker Rule invites ridicule. It is immaterial whether or not this particular set of trades by JP Morgan is classified as “proprietary”; all megabanks should be presumed incapable of managing their risks appropriately.

Read the rest here.