JP Morgan Aims at Volcker Rule Shoots Self in Foot

      Funny I am currently reading a Levy Institute PDF about how Dodd-Frank and the "Volcker Rule" have loopholes in them and now this morning the big story in the markets is that JP Morgan just lost $ billion in trading losses trying to exploit this very Volcker Rule.

     For the Levy Institute paper please see

     http://www.levyinstitute.org/pubs/eBook_2012.pdf


      Early developments today seem not to suggest this was the work of one "rouge trader" according to Dennis Gartman:

    "I operate under the old rule that there is never just one cockroach, when ill news comes out there is usually more ill news to follow,” the famed investor and former floor trader said."

    “This clearly isn’t a rogue. This is not the same thing that happened at SocGen, by any stretch of the imagination,” said Gartman, making reference to the 2008 trading losses suffered by French Bank Societe Generale [GLE-FR17.07-0.435(-2.48%)] at the hands of a single trader, Jerome Kerviel."

    http://www.cnbc.com/id/47382541

    Not just one cockroach. Nice analogy. Dimon was no fan of the Volcker Rule so it's not surprising he'd try to exploit a loophole in it:

    "Dimon's biggest regulatory beef is with a requirement that will force JPMorgan and other large banks that are deemed "Systemically Important" to hold as much as a third more capital than the minimum other banks have to hold to protect themselves against bad loans and other losses. He called the rule "contrived," and said that it would make the banks less diversified, not more so. Dimon said he also had problems with the Volcker rule, which limits banks' ability to make risky trades, and with rules that govern derivatives, an area that JPMorgan is big in."

      http://delong.typepad.com/sdj/2012/05/mathew-yglesias-jp-morgan-loses-2-billion-in-massive-failed-effort-to-exploit-volcker-rule-loophole.html

    "While stressing that not all the facts are yet available, Gartman said he believed the failed hedging mechanism appeared more akin to “a proprietary trading operation,” whereby a bank uses its own money rather than its customers’ money to trade stocks, bonds, currencies and other financial instruments."

    "Such “prop trading” would be a violation of the Volcker Rule, which is not law but is currently being considered by Congress."

     "JPMorgan Chase CEO Jamie Dimon, an outspoken critic of the Volcker Rule, denied to analysts and reporters on Thursday that the loss stemmed from any trade that would be a violation of the rule."

      In any case the future for JP Morgan unwinding these trades looks bleak and the market will be dragging at the open because of this:

     “The market now knows the positions that Morgan's group has, and when the other guy knows what you have they make it very uncomfortable to get out," Gartman said.

    "The sad thing is now that we known where these positions lie it’s going to be even more difficult for JPMorgan to get out of them,” he added.

    "JPMorgan shares fell almost 7 percent before U.S. markets opened Friday and dragged other financial shares lower. Citigroup [C30.650.20(+0.66%)] fell 3.6 percent and Bank of America [BAC7.70-0.03(-0.39%)] shares dropped 2.6 percent."