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JPMorgan Chase-ened

NEW YORK ( Real Money) -- JPMorgan Chase's (JPM - Get Report) multi-billion-dollar trading losses have rearmed Washington's bank-bashers and reform advocates, all while creating a political football that the Obama White House, at least initially, seems unsure about kicking. I see several negative implications for the largest U.S. banks.

At a minimum, gone now are hopes that the Federal Reserve Board might delay into autumn any release or re-proposal of moderated regulations for implementing the "Volcker Rule" -- Dodd-Frank Act's (DFA) ban on proprietary trading. This has upended, overnight, what had emerged as a positive storyline in early spring. That story had contributed to optimism toward banks and financials through late March, when we saw the return of fears of economic weakness and euro exposure.

Now the environment has become a very different one. Regulators are under pressure from Hill Democrats to post a hardened, not softened, set of proprietary trading curbs as close as possible to the July 21 Dodd-Frank deadline -- a deadline that they've already telegraphed they will miss. This will make consensus even harder to reach.

At the height of an election campaign -- one in which the sitting president has made financial regulation one of his top issues -- the Fed, Office of the Comptroller of the Currency (OCC) and others will want to avoid issuing a significant final rule. As these conflicting forces play out, some will challenge industry-friendly Republicans and likely GOP presidential nominee Mitt Romney to defend their previous attacks on the DFA.

Likewise, banking officials and lobbyists are now braced to be vilified again on the campaign trail. True, the president himself has been restrained in his comments, referring to JPMorgan as "one of the best-managed banks." Still, there is at least some fear that Obama could launch another round of fresh challenges and hostile rhetoric toward the industry in an effort to gin up his liberal base.

Ultimately, while the Fed will be exhorted to totally eliminate the "portfolio-hedging" exemption allowed under Volcker's proprietary-trading ban, we believe the Board is more likely to impose additional restrictions or limitations instead. (As a reminder, market-making would be allowed, but related profits and risk would be heavily monitored. Hedging on individual positions would also be OK, although the breadth of "aggregate" position-hedging is now heavily in question.)

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