Rep. Barney Frank, D-Mass., is using the news of JPMorgan Chase's $2 billion trading loss as evidence that the Dodd-Frank Act should not be rolled back.
TheHill.com reports that Frank, the co-author of the legislation and the ranking member of the House Financial Services Committee, is holding up the bank's loss as evidence that financial reform was not hindering the banking industry.
‘In other words, JPMorgan Chase, entirely without any help from the government, has lost, in this one set of transactions, five times the amount they claim financial regulation is costing them,’ says Frank. ‘The argument that financial institutions do not need the new rules to help them avoid the irresponsible actions that led to the crisis of 2008 is at least $2 billion harder to make today.’
Frank also observes that JPMorgan Chase had previously announced its opposition to the Dodd-Frank Act by claiming that its rules would cost between $400 million and $600 million.
However, Frank's charges have been refuted by John Makin, an economist with the American Enterprise Institute (AEI).
‘At the very least, the JPMorgan fiasco demonstrates the ineffectiveness of Dodd-Frank as a viable guardian of financial stability,’ says Makin. ‘The problem is structural. Depository institutions that enjoy protection afforded by deposit insurance and their absolute large size – too big to fail – should not be allowed to engage in proprietary trading.’
Malkin adds that JPMorgan's problem goes beyond the Dodd-Frank Act and into the realm of Federal Reserve Chairman Ben Bernanke.
‘The Fed faces a difficult choice,’ he continues. ‘The need to counter the impact of financial uncertainty on the economy has risen, while the opposition to doing so has also increased in view of JPMorgan's apparent willingness to embrace risks that it does not understand and/or cannot manage. In the short run, expect Bernanke's assurance that the system is sound and that the Fed stands ready to meet any liquidity needs. Over the longer term, the Fed will want to put bankers on a shorter tether that limits proprietary trading.’