The $2 billion pre-tax trading loss announced last night by JPMorgan Chase will have a significant effect on the tone of the debate on financial regulation, especially the “Volcker Rule” that was part of the Dodd-Frank financial reform legislation. The loss smoothes the path for those who wish to seriously limit the trading operations of banks and makes it more difficult for others to raise the myriad objections, many of them quite valid, about the specific proposals.
Although I am disturbed by the loss, both as a citizen and as a former employee of JPMorgan, it is also important to keep the loss in context. $2 billion is a large number, but it represents less than a tenth of last year’s pre-tax earnings for the company, roughly a hundredth of the $189 billion of the firm’s net worth, and about one-thousandth of its $2.3 trillion of assets.
We will learn more about the details of the “egregious errors” which CEO Jamie Dimon admitted were made by the bank, which may change my perspective. At this point, though, it appears that neither the Volcker Rule nor former Kansas City Fed President Hoenig’s proposal to split trading off from commercial banking would have affected the activities that led to the losses. JPMorgan has indicated that these activities were “hedges,” meaning they were undertaken to reduce the total risk of the bank. We want banks to hedge and all the proposals are careful to try to allow banks to continue their hedging activities. These particular hedges were poorly executed and went spectacularly wrong. However, the incompetence of the execution would not have impacted whether they fell under the rules.
In sum, this is not a loss large enough to come close to shaking the financial markets and it may not even have many analytical implications for the Volcker Rule and related proposals, but it will certainly affect the tone of the political debate. Expect the implementation of the Volcker Rule to be more restrictive than it would otherwise have been and expect further life to be breathed into more aggressive proposals to restructure banks through regulation.
Sentiment inside the Beltway has turned sharply against China. There are many issues where the two parties sound more or less the same. Trump and others in the administration seem heavily invested in a ‘get very tough with China’ stance. It’s possible that some Democrats might argue that a decoupling strategy borders on lunacy. But if Trump believes this will play well with his core constituencies as his reelection campaign moves into high gear, he will probably decide to stick with it, if the costs and the collateral damage seem manageable. But that’s a very big if, especially if the downsides of a protracted trade war for both American consumers and for American firms become increasingly apparent.