The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.NEW YORK ( TheStreet) -- In 2007, the banks gambled on mortgages and lost, causing the largest global recession since 1929. They then gambled on European sovereign debt and lost. And now we hear JPMorgan Chase ( JPM) just lost $2 billion on a derivatives' bet. Should this not be the last straw? There are important lessons to be learned from all this, lessons the bank lobbyists don't want anyone to hear.
Lesson One: More Regulation Is Not the AnswerThe immediate reaction to the JPM fiasco is to look at bank regulatory filings. But note: The New York Times reported that neither the U.S. nor British regulators were even aware of the JPM unit that made the trades until they were tipped off by the media. Are tougher regulations the answer? No. Banks will always be one step ahead of the regulators. We have had Basel I, II and III standards. And despite these, we have had the U.S. bank collapse, the euro near bank collapse, and this latest loss. How about this? In addition to bank presidents signing off and taking responsibility for all bank reports, let's ask the regulators to take responsibility as well. The regulators would refuse. They have no idea what banks are really doing. Do they know anything more than they did in 2008? I doubt it. I believe trying to regulate banks as currently constituted will never work. They are simply too complex to be effectively regulated. Note further: The U.S. banking crisis is not over. More than 50% of the 742 banks that borrowed money from the Troubled Asset Relief Program (TARP) have not even started to pay off their debts.
Lesson Two: The Volcker Rule Is Not EnoughThe Volcker Rule is in Dodd-Frank, Title VI, Sec. 619, (a)(1) reads:"Unless otherwise provided in this section, a banking entity shall not (A) engage in proprietary trading; or (B) acquire or retain any equity, partnership, or other ownership interest in or sponsor a hedge fund or a private equity fund ... in no case may the aggregate of all of the interests of the banking entity in all such funds exceed 3% of the Tier 1 capital of the banking entity." Gabriel Sherman reported that banks were taking steps that made one think the rule had real teeth:
- Goldman Sachs: "Months before the Volcker Rule was set to kick in, star traders began to leave in droves."
Morgan Stanley: "Morgan Stanley announced ... it was getting out of prop trading entirely."
Citigroup: "Citigroup announced that it, too, was closing its prop-trading desk."
"Certain products are gone forever. ... Fancy derivatives are mostly gone. Prop trading is gone. There's less leverage everywhere. Mortgages are back to old-fashioned conservative mortgages. ..."
Lesson Three: Dodd Frank Is Just What the Bank Lobbyists WantLet's go back to the Dodd Frank text. Right after the Volcker Rule statement, it reads:
"Not later than 6 months after the date of enactment of this section, the Financial Stability Oversight Council shall study and make recommendations on implementing the provisions of this section so as to ... promote and enhance the safety and soundness of banking entities. ..." In short, the bill calls for Federal financial regulators to study the measure, and then issue rules implementing it based on the results of that study. So who will be on this Financial Stability Oversight Council? It will be chaired by the Secretary of the Treasury Geithner (Geithner is looking forward to a job in the financial industry). Other members: the Chairman of the Fed, the Comptroller of the Currency, the Director of the Bureau of Consumer Financial Protection Bureau, the Chairman of the Securities and Exchange Commission, the Chairperson of the Federal Deposit Insurance Corporation, the Chairperson of the Commodity Futures Trading Commission, the Director of the Federal Housing Finance Agency, the Chairman of the National Credit Union Administration Board, an independent member appointed by the president with the advice and consent of the Senate. With the exception of Bernanke, this will be a group of politically driven bureaucrats. Just after the Bill was enacted,