Why Michigan Needs Us to Close the JPMorgan Loophole
You’ve probably seen the recent news coverage of losses at the nation’s largest bank, JPMorgan Chase. And you may have seen some of the resulting coverage about bank regulations and something called the “Volcker Rule.” I want to give you my sense of why this is such an important issue to Michigan families and businesses.
JPMorgan is a bank, and it does the things you and I use banks for – it offers checking and savings accounts, makes loans for people to buy cars or houses or to invest in their businesses, and so on. But other parts of JPMorgan get involved in little-known financial markets. That’s where JPMorgan made a very big and complicated bet that now has gone very wrong. When JPMorgan first disclosed the problem, it said the bank would lose at least $2 billion, and those losses are likely to grow.
This is bad news for JPMorgan. But is it bad news for the rest of us? Yes, for two major reasons.
First, the bank accounts that consumers and businesses have deposited at JPMorgan are insured by the federal government. That means if the bank loses so much money that it goes out of business, the FDIC has to cover those bank accounts, and that’s a hit to the federal treasury.
Second, JPMorgan is a very big bank – so big, in fact, that if it went out of business, or even was significantly weakened, it could cause problems for the whole economy.
That’s what happened in 2007 and 2008 during the financial crisis. Large financial institutions made big, risky bets, just like the bets JPMorgan is now losing. Those losses got so big that the institutions either failed or had to be bailed out by taxpayers to keep them from failing. The crisis shut down credit markets and decimated the economy; only the fact that the federal government stepped in with taxpayer dollars to stop the bleeding prevented a full-blown depression.
In 2010, Congress took action to prevent this cycle of big-bank losses and financial crisis. We passed the Dodd-Frank Wall Street Reform Act. This historic legislation plugged lots of different holes in our financial system. The provision relevant to the JPMorgan scandal is one that I wrote along with Sen. Jeff Merkley of Oregon.
Our legislation put into law something known as the “Volcker Rule.” It’s named after former Federal Reserve Chairman Paul Volcker, who has said that banks that hold federally insured deposits, or are so large that their failure would put the economy at risk, should not be allowed to make the kind of risky financial bets that are now costing JPMorgan so much money. Sen. Merkley and I fought hard during the Wall Street reform debate to put that principle into law, and despite lots of opposition from Wall Street, we succeeded.
The law we wrote, if enforced, would have prevented these trades. But the battlefield moved from Congress to the federal agencies that must write detailed rules to implement our law and then enforce those rules. JPMorgan and other banks lobbied those agencies to delay the law and to put a loophole in the rules that would allow these kinds of risky bets. A preliminary draft of the rules included just such a loophole.
Sen. Merkley and I and other members of Congress are pushing back. We want to strengthen the spines of our regulatory agencies and make sure that the final rules, due in a few weeks, eliminate the “JPMorgan loophole” that would allow banks to continue making risky bets.
Financial crises start on Wall Street, but they hit Michigan hard. The last crisis came at the worst moment for Michigan, at a vulnerable time for our auto companies. It hit us when we had already been suffering tough economic times. Tens of thousands of Michiganians lost jobs, homes or businesses because of the last crisis.
Now that Michigan is bouncing back, we can’t let another crisis sparked by risky bets on Wall Street put us all in danger. I’ll keep working with my colleagues to make sure that rules are in place to help prevent another crisis.