In wake of $2 billion loss at JPMorgan Chase, Merkley renews call for a strong Volcker Rule

Kari Chisholm FacebookTwitterWebsite

It's a story that's taken me a while to wrap my brain around. After all, I don't often pay close attention to the whirlings of Wall Street. The talking heads talk about who's up and who's down on the Street, and I quickly change the channel to the latest transactions in the world of sports.

But over the weekend, one of those Wall Street stories pierced even my deliberate shield of ignorace. It seems that JP Morgan Chase - the bank that survived the 2008 meltdown - managed to lose some $2 billion on a bad bet. Actually, it was a hedge, one of those transactions designed to reduce risk and yet seemingly keep exploding all over the big bankers. Paul Krugman explains:

What did JPMorgan actually do? As far as we can tell, it used the market for derivatives — complex financial instruments — to make a huge bet on the safety of corporate debt, something like the bets that insurer AIG made on housing debt a few years ago. The key point is not that the bet went bad; it is that institutions playing a key role in the financial system have no business making such bets, least of all when those institutions are backed by taxpayer guarantees.

As Krugman noted, bankers making bad bets aren't the problem. The problem arises when those same bankers rely on all of us to shore them up when things go sideways.

And that's the point that Senator Jeff Merkley stressed in the aftermath. From The Hill:

"What yesterday’s announcement makes abundantly clear is that even JP Morgan, supposedly the best risk manager on Wall Street, can make bets that go spectacularly wrong. This is exactly why the banks that our businesses and families depend [on] for loans should not be in the hedge fund business," Sen. Jeff Merkley (D-Ore.) said in a statement on Friday. "Moreover, it is essential that bank regulators issue rules that do not permit hedge fund investments by Wall Street banks to be disguised as ‘market making’ or ‘risk mitigation,’ as this case so dramatically demonstrates." ...

"I ask, once again, that regulators implement without delay a Volcker Rule as intended by Congress, with a clear, effective firewall between hedge fund-like trading and traditional banking."

Which is why Washington Post reporter Brad Plumer tweeted last week:

Yup, sounds about right to me.

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    Full disclosure: My firm built Jeff Merkley's campaign website. I speak only for myself.

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    I've updated this post with video of Senator Merkley's appearance on MSNBC this morning.

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    So do we think Sen. Merkley is speaking from personal experience here? Has been burned by hedge funds trying to deep fry a turkey in the living room?

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    Un-regulated capitalism is mathematically unstable. Without rules (regulations) markets go through wild swings and crash -- they simply have no stable point. The idea of a self-regulating capitalistic market, without external regulations (rules), is an irrational religion based on ideology -- it fails and will continue to fail whenever it's tried. It is in the best interests of capitalists (including markets) as well as society, as a whole, to have a well-regulated and stable system of economics. Merkley is right in trying to accomplish this.

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    We have so many reasons to be proud of Senator Merkley. He's a good strategist, but he's a great wonk, not only willing but able to provide excellent analysis.

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    We are blessed in Oregon to have strong progressive voices, Merkley, Defazio and Blumenauer to name the ones who resonate with me the most. I am 100% behind them. Ron Wyden is OK, but he is to progressives what Hatfield was to Republicans, independent and proud of it.

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