Six years ago JP Morgan, the big bank, suffered a trading loss of between $2 billion and $3 billion. Investors were worried that this would nibble into their fortunes. Those who had money deposited – rather than millions amassed – worried more. But during this Wall Street melee, two factors were overlooked. The first was a law, enacted 21⁄2 years earlier, that had been shaped to head off the kind of hanky-panky that leads to multi-billion dollar gambles with depositors’ money; the second factor was the long, slow grinding of congressional gears.
In 2010, Congress had passed the Dodd-Frank bill, named for Sen. Christopher Dodd and Rep. Barney Frank, who wanted something done about the government’s toothless regulation of huge banks. This law carried a provision called the Volker Rule, named for former Fed Chairman Paul Volker. It forbid commercial banks – which accept deposits from customers – from making speculative (“proprietary”) trades, or, gambling with depositors’ money. The gambling was left to investment banks, such as Goldman Sachs, which are in business to gamble, mostly with their own money or clients’ funds.
The question with the commercial bank JP Morgan was whether it was gambling in the markets, or whether it was simply investing to “hedge” against risks in other parts of its (then) $150 billion portfolio. This argument would not be resolved soon. In fact, the entire issue had been speculative.
That’s because the Dodd-Frank law, which has since been gutted by a Republican congress, was mostly an outline from which regulators wrote the fine print; not much of that writing was done, including most of the Volker Rule. Put another way, there was no law to argue because, two years after it passed, the outline still was not converted to statute. Today’s wealth-friendly congress ensures that it won’t become law any time soon, if ever.
It was silly to say certain banks are too big to fail. We’ve known all along that they’re too big to regulate.
‒ JOHN MARSHALL