* Fed's Tarullo: Volcker will shed light on hedging trades
* JPMorgan trading losses tied to failed hedging strategy
* OCC's Curry says JPMorgan red flags apparent in hindsight
* Lawmakers back tough capital rules
By Dave Clarke and Alexandra Alper
WASHINGTON, June 6 U.S. bank regulators likely
would have had an earlier look at JPMorgan Chase & Co's
unraveling hedging strategy if the Volcker rule had been in
place, Federal Reserve Governor Daniel Tarullo said on
Tarullo argued that under a proposal released in October to
implement the crackdown on proprietary trading, banks would have
to say in writing how a trade would hedge risk and should
therefore be exempted from the Volcker rule.
"If a firm said, 'We are doing this as a hedge', they would
be required to explain to themselves internally as well as to
the primary supervisor, what the hedging strategy was... and how
they would make sure it didn't give rise to new exposures," he
told the Senate Banking Committee.
"I suspect we're going to find in this case that there was
an absence of documentation both within the firm and in
reporting to supervisors," said Tarullo.
JPMorgan announced last month that a failed hedging strategy
had morphed into something more speculative that has produced at
least $2 billion in losses. JPMorgan Chief Executive Jamie
Dimon, who will appear before the same Senate panel next week,
has called the trades "sloppy" and "stupid".
The announcement has shaken Wall Street and Washington,
raising questions about whether banks are still taking too many
risks following the 2007-2009 financial crisis and how much
capital they should have to hold as a safeguard against losses.
During the hearing on Wednesday, lawmakers pressed
regulators on whether they fell down on the job and what sort of
implications JPMorgan's losses have for financial reform.
"Shouldn't the sheer size of these trades have been a huge
red flag for the OCC?" asked Democratic Senator Robert Menendez
to Thomas Curry, the head of the Office of the Comptroller of
The OCC is the primary regulator for JPMorgan's banking
activities and has 65 on-site examiners for the institution.
Curry became head of the OCC in April, and JPMorgan's
trading losses pose an immediate test for how he will lead an
agency that oversees the largest U.S. banks and has come under
criticism, particularly from Democrats, for not being tough
enough on the industry.
In his testimony, Curry said his office is still
investigating what his office could have done better, as well as
exactly what the bank was doing with the trades. Curry was
nominated for the job by President Barack Obama but he faced the
stiffest questioning from the president's fellow Democrats on
Senator Sherrod Brown of Ohio observed that some JPMorgan
executives have left in the wake of the trading loss, including
Ina Drew, chief of the hedging unit in question.
"If JPMorgan can hold its senior executives accountable,
which they appear, at least in part, to be doing, we should
expect nothing less than you, Mr. Curry, and the people who work
for you," Brown said.
VOLCKER RULE IN THE WORKS
The losses have, in particular, put a renewed focus on
regulators efforts to put the Volcker rule in place, which
prohibits banks from making trades with their own money for
The goal of the rule is to prevent banks that enjoy
government backstops like deposit insurance from making risky
trades that could ultimately endanger taxpayer and depositor
A proposed Volcker rule was released in October and a final
rule is expected in the next few months.
The 2010 Dodd-Frank financial oversight law allows for some
exemptions to the Volcker rule, including making trades to hedge
Supporters of the restrictions are pressuring regulators to
tighten the hedging exemption, arguing the JPMorgan losses are
evidence that the October draft would provide too much leeway.
Curry said it's too early to know if JPMorgan's trades would
have fallen under the exemption. He told the senators that the
trading losses speak more to risk management problems at the
bank that go beyond individual rules.
"It's still a risk management issue regardless of the
Volcker rule," he said.
CAPITAL IS KING
The hearing underlined that the largest U.S. banks are
losing their argument that new capital rules, which govern how
banks fund themselves, are too strict and will impair their
ability to lend.
Tarullo emphasized that JPMorgan's ability to successfully
weather the trading losses was evidence that the central bank's
focus on tougher capital standards is justified.
Several Republicans backed this stance. "The larger you are,
the more capital you need," said Richard Shelby, the top
Republican on the committee, who told reporters after the
hearing that Basel III standards calling for a 7 percent capital
buffer may not be high enough.
Republicans have been critical of Dodd-Frank, saying it is
overly complicated and will damage the banking industry without
greatly enhancing financial stability.
Particularly since JPMorgan announced its losses,
Republicans have pointed to tough capital standards as a simple
way to ensure that if a bank takes risks that result in losses
they will have enough equity on hand to absorb the blow.
The Fed on Thursday will release a proposal for how the
United States will implement the new Basel III international