WASHINGTON (Reuters) - Wall Street may have lost its most potent spokesman against Washington reforms.
JPMorgan Chase & Co Chief Executive Jamie Dimon has parlayed his bank's reputation as a white knight during the financial crisis into a position as the champion of a beleaguered industry fighting against excessive post-crisis regulation.
But the revelation of a shocking trading loss of at least $2 billion from a failed hedging strategy diminishes Dimon's credibility, and is already unleashing calls to get tougher on big banks.
"The argument that financial institutions do not need the new rules to help them avoid the irresponsible actions that led to the crisis of 2008 is at least $2 billion harder to make today," said Democratic U.S. Representative Barney Frank, who co-authored the 2010 Dodd-Frank financial reform law.
Details are still emerging about the trading loss, the amount of which could still grow, and about the underlying transactions that Dimon said were done to hedge the firm's overall credit exposure.
Analysts said it is not yet clear if the trades would have violated the forthcoming Volcker rule reform.
Dimon has been critical of the Volcker rule, a provision in Dodd-Frank that will ban banks from proprietary trading, or trades that are made solely for their own profit.
Regulators are still working to finalize the rule - an initial proposal was released in October - and to define an exemption for hedging.
They have struggled with how to keep the exemption broad enough to allow for bona fide hedging yet narrow enough to ensure that banks cannot pass off speculative bets as hedges.
On Friday, Democratic senators Carl Levin and Jeff Merkley, who wrote the legislative language on the Volcker rule, said the outstanding proposal is flawed because it would give banks the latitude to hedge against portfolio risk as opposed to individual positions.
"That's a big enough loophole that a Mack truck could drive right through it," Levin said during a conference call.
Levin and Merkley said the final rule should reverse course and narrow the exemption in light of JPMorgan's disclosure that the trades gone bad were hedges against its overall credit exposure.
Securities and Exchange Commission Chairman Mary Schapiro, whose agency is among the regulators finalizing the Volcker rule, said on Friday that regulators are monitoring the JPMorgan situation.
"I think it's safe to say that all the regulators are focused on this," Schapiro told reporters after speaking at an Investment Company Institute conference in Washington.
Regulators are already getting some heat, particularly since the Federal Reserve recently conducted stress tests to gauge the strength of U.S. banks, which resulted in JPMorgan being allowed to increase its stock dividend.
Terry Haines, an analyst with Potomac Research Group, said it's a safe bet that the 2013 stress tests will come with much more scrutiny of investment banking activities.
Republican Senator Bob Corker on Friday called for a hearing into JPMorgan's trading loss, saying policymakers need to know whether the trades in question were bona fide hedges or poorly managed proprietary trades.
The trading loss emboldened others to call for even more dramatic reforms than those currently being carried out as part of Dodd-Frank.
The 2010 law stopped short of dismantling the biggest banks or bringing back the Glass-Steagall law that separated federally insured banks from investment banks and insurers.
Dallas Federal Reserve Bank President Richard Fisher, who has advocated the breakup of the top five U.S. banks, said on Friday he is worried the biggest banks do not have adequate risk management.
"What concerns me is risk management, size, scope," he said at a Texas Bankers Association meeting in answer to a question about JPMorgan's trading loss.
The issue quickly became political with Democrats pointing out that Mitt Romney, the presumed Republican nominee for president, has called for repealing Dodd-Frank.
Andrea Saul, a Romney spokeswoman, noted that JPMorgan's investors, not taxpayers, will incur any losses from the hedging strategy. "As President, Gov. Romney will push for common-sense regulation that gives regulators tools to do their jobs, and that gives investors more clarity," she said.
It is unclear if the calls for tougher regulation will translate to anything substantive.
Jaret Seiberg, a senior policy analyst with Guggenheim Securities, said the fact that the bank is able to handle the loss without major damage to its balance sheet is evidence that large banks can handle these types of risks.
JPMorgan is the largest U.S. bank with roughly $2.3 trillion in assets.
"We doubt, however, that many in Washington will share our positive take on the losses," Seiberg wrote in a note.
JPMorgan emerged from the 2007-2009 financial crisis with the best reputation among big U.S. banks for identifying risk and for staying away from the pitfalls, like too much exposure to the subprime housing market, that damaged its rivals.
With that credibility in tow, Dimon has been vocal with his view that excessive regulation such as stringent capital standards would make it harder for banks to provide loans and help drive economic growth.
"Has anyone bothered to study the cumulative effect of all these things?," he asked Federal Reserve Chairman Ben Bernanke in June at a banking conference in Atlanta. "Do you have a fear, like I do, that when we look back and look at them all that they will be a reason it took so long that our banks, our credit, our businesses and most importantly, job creation, started going again?"
While the industry's all-out lobbying and pressure campaign to soften the impact of Dodd-Frank rolls on, Dimon was quick to admit on Thursday that in the case of the trading loss, mistakes were made and bank executives have "egg on our face."
The mea culpa, however, does not soften the shot to his reputation.
"This is a black eye and it's acute because Jamie has been so critical of Dodd-Frank and the regulatory response to the financial crisis," said Brian Gardner, an analyst at Keefe, Bruyette & Woods Inc. "It undercuts his credibility at least in the short term."
Reporting by Dave Clarke, Mark Felsenthal, Alexandra Alper and Steve Holland; Editing by Karey Wutkowski, Tim Dobbyn, Gary Hill