U.S. lawmakers and interest groups favoring tighter restrictionson proprietary trading said JPMorgan Chase & Co.'s $2 billionloss on synthetic credit securities bolsters their case.

Senator Carl Levin, the co-author of the so-called Volcker ruleand chairman of the Permanent Subcommittee on Investigations, saidthe New York-based bank's disclosure yesterday served as a “starkreminder” to regulators drafting the proprietary-trading banrequired by the 2010 Dodd-Frank Act.

“The enormous loss JPMorgan announced today is just the latestevidence that what banks call 'hedges' are often risky bets thatso-called 'too-big-to-fail' banks have no business making,” Levin,a Michigan Democrat, said in a statement.

The Federal Reserve, Securities and Exchange Commission andFederal Deposit Insurance Corp. are among regulators drafting theso-called Volcker rule to limit bets banks can make with their ownfunds. JPMorgan, with other Wall Street banks including GoldmanSachs Group Inc. and Morgan Stanley, have lobbied regulators toexpand exemptions included in a draft proposal released lastyear.

“Their ability to shape the discussion in Washington, D.C., onthe Volcker rule might have gotten materially set back,” DavidHendler, an analyst at CreditSights Inc., said in an interview.

Levin and Senator Jeff Merkley, the Oregon Democrat on theSenate Banking Committee who co-wrote the provision, have usedmeetings and a comment letter to press regulators to tightenrestrictions in the final rule, first proposed by former FedChairman Paul Volcker.

Asked about the JPMorgan disclosure, Julie Edwards, Merkley'sspokeswoman, said the loss “speaks for itself.”

The Volcker rule is intended to reduce the chances banks willput federally insured depositors' money at risk. Wall Street firmshave argued it is so broad and poorly defined it will force them toshed business lines and could increase risks for their clients.

“They've now just provided some ammunition, one would suspect,to the legislative and regulatory personnel who will just point atthis and say, 'It seems to me that these people don't really have agood handle on what they're doing,'” Satyajit Das, author of“Extreme Money: Masters of the Universe and the Cult of Risk,” saidin a phone interview from Sydney.

Self-Inflicted Losses

JPMorgan Chief Executive Officer Jamie Dimon said that while thelosses were “self-inflicted,” they may not have run afoul of therule and don't weaken arguments against the proposal.

“This does not change analyses, facts, detailed argument,” Dimonsaid yesterday on a conference call with Wall Street analysts. “Itis very unfortunate. It plays right into all the hands of a bunchof pundits out there.”

Volcker, who testified to the Banking Committee on May 9, toldreporters there was “no question” that lobbying from bankscontributed to the complexity of the 298-page initial proposalreleased by regulators.

“I could give you stories all day about lobbyists making thingsmore complicated,” Volcker said.

The Volcker rule allows banks to continue activities that areconsidered hedging, as well as to serve as market-makers, whenfirms accept the risk or hold shares of trades to facilitate clientorders.

Dimon said on the conference call that the original premise ofthe trades by the chief investment office was for the firm'shedging. Synthetic credit products are derivatives that generategains and losses tied to credit performance without the ownerbuying or selling actual debt.

Levin and Merkley, in their February comment letter, pushedregulators to tighten the exemption for hedging, calling some ofwhat may be allowed a “major weakness” in the rule.

JPMorgan's disclosure “shows the need for financial reform,especially a strong Volcker rule, to limit such risky betting,”Dennis Kelleher, president of Better Markets, a non- profit groupthat advocates for tighter financial rules, said in a statement.“Too-big-to-fail banks like JPMorgan, with trillions in assets andtrillions more in high-risk investments and trading, requireregulation and transparency.”

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