Matthew Yglesias rails against JP Morgan for having had an investment go south:
Remember the "Volcker Rule" that was supposed to stop systemically significant financial institutions from wracking up huge losses on proprietary speculative bets? Well earlier this evening JP Morgan CEO Jamie Dimon announced that his company just lost $2 billion on some of (French-born) "London Whale" Bruno Iksil's bets on credit default swap indexes.
Dimon repeatedly insisted that the whole operation is Volcker-compliant, and JP Morgan is describing the operation as an effort at hedging gone wrong. Nobody knows exactly what happened, but in general if you just lost $2 billion that's a good sign that you're not hedging. The idea of hedging is to accept a small cost in order to insure yourself against the risk of a big loss. Two billion dollars is a big loss even for JP Morgan. So why call it hedging? Presumably because the Volcker Rule allows proprietary trading for the purposes of hedging. This turns out to be a big loophole.
Minor problem: There is no Volcker rule. To be sure, Dodd-Frank ordered regulators to come up with one, but to date they have failed to promulgate a final rule.
Update: The original title for this post was "Matt Yglesias accuses JP Morgan of violating nonexistent rule."
Yglesias objected thereto, sending along the following email:
Excuse me, but my post simply does not accuse JP Morgan of violating the Volcker Rule. If anything, it does the reverse—it accuses the rule of not banning what JP Morgan did even though you would have to ban what JP Morgan did to achieve the policy aims that were supposed to animate it.
Fair enough. So I changed the title. My point remains, however, that there is NO Volcker rule. The regulatory agencies are still trying to finalize one. So why would Yglesias accuse Morgan of having ducked a non-existent rule?
My suspicion thus is that pundits like Yglesias are now going to seize on JP Morgan's bad bet to push for last minute changes that will make the rule--if and when adopted--even more restrictive. Indeed, as Bloomberg reports, Jamie Dimon sees it coming:
“It is very unfortunate,” he said, “this plays right into the hands of pundits out there. But we have to deal with it.”
Argument by anecdote is a useful rhetorical tactic, but lousy evidence. JP Morgan made a bad bet, but it is hardly one that threatens the health of the firm, let alone the economy. Indeed, Yglesias concedes as much:
As it happens in this case JP Morgan has a big enough capital buffer to eat the loss and they only lost $2 billion rather than $20 billion.
But that bad bet is going to be seized upon by Yglesias and/or his ilk to justify an even more expansive version of what I firmly believe is a regulatory nightmare that isn't going to work. Indeed, immediately after acknowledging that Morgan can "eat the loss," Yglesias goes on to say:
But nothing was stopping them from screwing up even worse.
The reader is left to infer that something ought to be there to stop Morgan. Namely, a tougher Volcker rule without this alleged "loophole."
