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Legislative Updates: June 2012

Capitol Call

When it was first scheduled, it was supposed to be a routine oversight hearing, with Securities and Exchange Commission (SEC) Chairwoman Mary Schapiro and Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler appearing before the Senate Banking Committee to talk about implementation of Title VII (the OTC derivatives section) of Dodd-Frank. Then everything changed.

The hearing, on May 22, quickly became the first opportunity for the Senate to question the regulatory agencies on why JP Morgan Chase lost $2 billion or more in a complex trading strategy that it characterized as failed hedges. Many policy questions quickly emerged, such as whether the Volcker rule would have prevented the loss; whether JPMC and other large financial institutions were too big to fail; what, if anything, the regulatory agencies could have done to prevent such a large loss; and what, if anything, should be done to prevent such a loss from happening in the future.

The only problem was that the CFTC and SEC don’t have jurisdiction over the French-born, London-based JPMC trader responsible for the losses. As the testimony made clear, the Office of Comptroller of the Currency (the other OCC) and the Fed (for the bank holding company) are the primary regulators for JPMC, so Chairman Gensler and Chairwoman Schapiro were unable to answer many questions about the JPMC trading losses. That didn’t stop the Senators from asking what the Commissioners knew, or what they could have done differently. In response, both Chairwoman Schapiro and Chairman Gensler repeatedly testified that the trades were made in an OCC-regulated bank and not an entity overseen by their agencies.

The Fed and the Comptroller had their turn in the spotlight a few weeks later during a follow-up hearing on June 6. Members of the Banking Committee grilled Comptroller of the Currency Thomas Curry about whether OCC, despite having 65 examiners at JPMC alone, was able to properly scrutinize the massive bank. Comptroller Curry said that the trading mishap suggested that the bank had “inadequate risk management” and that OCC is working to improve its oversight along with further investigating operations at JPMC.

The Senators’ comments during both hearings largely fell along party lines, with Democrats upset that a bank was able to lose $2 billion or more despite the various changes since 2008, and Republicans pointing out that JPMC is still profitable, the losses did not pose a threat to the banking system, and are not evidence that further regulation is needed.

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