Twenty-three months after President Obama gave us Wall Street "reform," the results are in — and theyre not pretty. The Dodd-Frank law didnt end "too big to fail"; it just gave Washington someone new to blame for the next blowup-and-bailout, namely the hapless regulators.
And senators who should care about Wall Streets health — such as New Yorks Chuck Schumer and New Jerseys Bob Menendez — are already leading the rush to blame.
Yesterday, the Democrat-led Senate Banking Committee hauled four big-bank watchdogs to Capitol Hill to find out how JPMorgan Chase lost at least $2 billion gambling taxpayer-guaranteed deposits on derivatives.
The point of the inquiry was to find out whether Dodd-Frank should have prevented the loss. And whether it was just good luck that kept that loss from ballooning to $10 billion or $50 billion — precipitating more bailouts.
The answers are easy: Nobody knows.
Nearly a month after JPMorgan announced its loss, nearly two years after Congress enacted Dodd-Frank and nearly four years since Obama started working on the problem, no leading light from the Office of the Comptroller of the Currency, the Federal Reserve, the FDIC or the Consumer Financial Protection Bureau could say whether Dodd-Frank should have prevented JPMorgan from making these trades.
Yes, Dodd-Frank prohibits "proprietary trading" — that is, banks speculating on stocks, bonds and other instruments for themselves, not for customers. But nobody knows what proprietary trading is, exactly — or whether JPMorgan was doing it.
Thats partly because Congress created big loopholes. A bank can trade for itself in order to "hedge" other risks — that is, to (try to) reduce its overall risk.
But reducing risk through complex derivatives is proprietary trading — a bet that things are about to get worse instead of better, and that your derivatives will work.
Indeed, its risky to hedge — and the bigger you are, the riskier it is. JPMorgan has $1.8 trillion in assets — and Dodd-Frank theoretically allows it to hedge them all, not one by one, but on an "aggregate" basis via huge trades like the derivatives bets that got it in trouble. Yet the bank cant possibly do such trades without posing a risk to the rest of the financial system.
In short, Dodd-Frank told regulators to do something that is impossible — to take the risk out of something that is a risk.
Unsurprisingly, regulators have had a hard time. The Feds Daniel Tarullo said yesterday, "I would certainly like someone" to review banks procedures "more carefully."
Um . . . who?
Should JPMorgan have done what it did? The nations financial comptroller, Thomas Curry, said: "Thats a question that were trying to address. . . Its a very complicated investment strategy both in terms of its size as well as complexity."
If regulators cant figure out what happened a month after it happened, despite having had 100 regulators on site to watch JPMorgans traders, how are they supposed to prevent stuff from happening? Curry could only chatter about mysterious "heightened supervisory expectations" and "increased awareness of risk."
In other words, Congress has ordered him to be omniscient, and he hopes he somehow will be soon — but he cant guarantee it.
And our local senators want to blame him and his fellow regulators.
Menendez told the regulators, "The blood will be on all of your hands if the London whale [JPMorgans aggressive trader] goes belly-up next time." The senator berated the regulators for not realizing that "we are serious" in making sure risks dont "become the collective risk of all of us."
Then Schumer stepped in to blame the regulators for failing to ensure that JPMorgans board of directors has "sufficient expertise" to manage risk.
But why do Schumer and Menendez even need someone to blame the next time a big bank fails?
Financial reform was supposed to ensure that big banks like JPMorgan can fail — just as any private business can — without taking down the economy. President Obama even told us that hed "put a stop to taxpayer bailouts once and for all."
If Dodd-Frank had done that, a bank failure would be none of Congresss business.
But Menendez and Schumer need to have someone to blame because they didnt fix the problem. The law they helped write doesnt prevent future bailouts. So, a year or five from now, they want to be able to tell us: Its the regulators fault, not ours.
Sen. Bob Corker (R-Tenn.) said it best: "Dodd-Frank was a political response instead of real reform."
Too bad someone closer to home — like Schumer or Menendez — wont admit that.
Original Source: http://www.nypost.com/p/news/opinion/opedcolumnists/the_next_bank_bailout_blame_game_aiBm4HYUTUVfmlmz284NLL