JPMorgan Chase (NYSE:JPM) raised a few eyebrows when it lost $5.8 billion earlier this year. The Volcker Rule in the 2010 Dodd-Frank Act is aimed at preventing huge, damaging losses like this, but JPMorgan and other banks have proved that the law lacks teeth. A United States Senate panel tasked with probing the loss is scheduled to announce their findings later this year in a move that many think will tighten regulations.
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The Volcker rule is specifically meant to prevent banks from making investments in self-interest. Through what Senator Carl Levin (D-Mich.), head of the Permanent Subcommittee on Investigations, calls “ill-advised loopholes,” traders were still able to make large, risky, proprietary trades. Bruno Iksil – a.k.a. “The London Whale” – has gained headlines recently because U.S. authorities are probing him in relation to JPMorgan’s losses. The issue is complicated because Iksil is a French national who traded in London. Despite the scandal, shares of JPMorgan are still up over 17 percent this year to date, after taking a huge hit in early June.
The same U.S. Senate panel has said that it won’t prosecute Goldman Sachs (NYSE:GS) as a result of its investigations triggered by the 2008 financial crisis. Goldman lost $1.2 billion in the crisis, but the panel decided that the company “didn’t bet against its clients,” as CEO Lloyd Blankfein argued. However, the bank settled with the Securities Exchange Commission for $550 million for issues related to misleading buyers of mortgage-related securities.
Most recently, big banks have been placed under aggressive scrutiny because of alleged manipulation of the London Inter-Bank Offered Rate. The U.S. arm of Standard Chartered is suspected of covering up nearly $250 billion in illegal transactions with Iran. HSBC (NYSE:HBC) has also been accused of violating economic sanctions by allowing nations like Iran and Sudan to launder money under their watch.
The banking system is a mess. In light of this, it’s likely that later this year the Senate committee headed by Levin will hit it with the regulatory hammer. The currently under-powered Volcker Act may become a thorn in the side of big banks, but the government is under a lot of pressure to act. In the mean time, we’re keeping an eye on how the behavior of big banks will affect not only their share prices, but all of Wall Street.