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NEW YORK (TheStreet) -- It's time for Congress to provide more guidance to bank regulators on exactly what kind of hedging activity will be permitted by banks, in the wake of
JPMorgan Chase's (JPM - Get Report) $2 billion trading loss announced last week.
JPMorgan's $2 billion loss on hedging trades -- announced by CEO James Dimon last Thursday -- is "a potential opportunity for the policy makers to conduct a public hearing to really understand exactly what went wrong here," according to Frank A. Mayer, -- a partner in the Financial Services Practice Group of Pepper Hamilton LLP -- who adds that "you don't want to make policy based on myth."
At issue is the Volcker Rule, which the
Federal Reserve is still struggling to implement, nearly two years after the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed. The Volcker Rule prohibits bank holding companies from engaging in most forms of proprietary trading while severely limiting banks' investments in private equity funds and hedge funds. The Federal Reserve has had difficulty in defining which hedging activities banks will be allowed to continue engaging in.
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According to Mayer, "Congress more or less left it up to the regulators to determine what is proprietary trading, what is a macroeconomic hedge and what is a hedge limited to a particular transaction or a particular customer's need."
"It is clear that Congress said you cannot bet your balance sheet to make money," Mayer says, adding that "based on public statements, it would appear that this was not normal hedging but a hedging of the balance sheet. The question is, was this proprietary trading?"
Mayer says that "having Congress provide insight into this issue of whether this macroeconomic hedging is prohibited proprietary trading or not, is direction that regulators need."
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On Thursday, following Dimon's announcement of the trading loss, Senator Carl Levin (D-Mich.) wasted no time in saying through a statement that "the enormous loss JP Morgan announced today is just the latest evidence that what banks call 'hedges' are often risky bets that so-called 'too big to fail' banks have no business making."