Wednesday, June 20, 2012

Unlike Bernanke's Volcker Rule which may have influenced the outcome, transparency would have prevented most, if not all, of JP Morgan's trading loss

In perhaps the definitive statement about just how little the Dodd-Frank Act accomplishes, Fed Chairman Ben Bernanke observed that had the Volcker Rule been in place it may have been able to influence the outcome of JP Morgan's credit default swap trade.

May have?  You have got to be kidding me.  There were five different regulators who had access to the information on this trade and who missed it.

May have?  Could the bar for regulatory reform of the financial system be set any lower?

Excuse me, but your humble blogger thinks the global taxpayers deserve much better than reform which may or may not have made any difference.

Please compare Mr. Bernanke's 'may have' with your humble blogger's call for requiring the banks to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.

With ultra transparency, the position would never have been taken in the first place.  As a result, the loss would not have occurred.  This is what reform of the financial system is suppose to achieve.

Why would the trades not have taken place?  As is readily apparent by the fact that JP Morgan will not disclose its trades, JP Morgan is concerned that the market will trade against them.

This is why ultra transparency works!  With ultra transparency the banks are playing poker where they have to disclose all their cards.  Even bankers are not going to gamble when the other players get to conceal their cards.

Federal Reserve Chairman Ben S. Bernanke said the Volcker Rule may have been able to influence the outcome of JPMorgan Chase & Co.’s $2 billion trading loss. 
Bernanke said documentation of a trade’s rationale, an auditing process, governance rules and compensation limits that are part of the proposed Volcker Rule may have played a role in changing the result at the largest U.S. bank. The legislation aims to limit proprietary trading while allowing exemptions for market-making and hedging. 
One relevant feature of the rule “would have been the control of governance aspects,” Bernanke said today at a news conference. “That might have potentially changed the outcome.”
Any financial reform that does not hold out the definitive promise that it will change the outcome is worthless.
Five banking regulators, including the Fed and the Treasury Department’s Office of the Comptroller of the Currency, are finalizing the Volcker Rule....
These are the same regulators who failed to see the risk in a $100 billion CDS trade.
The Fed, as the regulator of bank holding companies, is helping oversee JPMorgan’s efforts to manage and eliminate risk from its portfolio. The Fed is looking at other parts of the bank’s holding company to determine if governance, risk management and control weaknesses are present elsewhere, Federal Reserve Governor Daniel Tarullo said in a June 6 Senate Banking Committee testimony.

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