Excerpt from article by EZRA KLEIN, The Washington Post
This trade, in fact, echoes the financial crisis: They bet on something unlikely as if it were impossible. That’s what all those banks did when they bet almost everything on the belief that the housing market never goes down everywhere all at once. It’s a reminder that even “good” banks make this kind of mistake. And remember, JPMorgan made this mistake less than four years after the fall of Lehman Brothers, so this came at a time when the lessons of the crisis were still fresh, and when regulators were watching closely.
So what does this mean in Washington?
JPMorgan has used its sterling reputation to fight the Volcker Rule. That’s the regulation that says banks that take commercial loans and get federal insurance to protect those loans — banks that you might open a checking account with, such as JPMorgan — can’t make speculative bets on their own behalf. If you’re going to be a bank, then you can’t play at the casino.
The problem is that it’s very hard to say when a bank is betting on its own behalf and when it is betting on its clients’ behalf. JPMorgan says that this trade was a “hedge” — that it was there to reduce risk, not make money. But given how exquisitely it blew up in JPMorgan’s face, regulators are going to make sure that the Volcker Rule will stop trades like this one from happening. Otherwise, they’ll get the blame next time. That means a much tighter rule, which in turn means JPMorgan (and other banks) won’t make as much money in the coming years. [MORE]