JPMorgan Chase & Co. Chief Executive Officer Jamie Dimonconceded a key point when pressed by lawmakers about a proposed banon proprietary trading at banks: Had the rule been in place, it mayhave prevented the firm's recent $2 billion loss.

The ban “may very well have stopped parts of what this portfoliomorphed into,” Dimon said yesterday in testimony to the SenateBanking Committee.

Dimon's comments provided new ammunition to lawmakers andregulators emboldened by JPMorgan's mistakes who argue that astricter ban on banks using their own money to make trades isneeded to prevent a repeat of the 2008 financial crisis. The ban,part of the 2010 Dodd-Frank Act, was named for Paul Volcker, theformer Fed chairman who championed the measure.

“The Volcker rule is the law,” Bart Chilton, a Democratic memberof the Commodity Futures Trading Commission, one of five federalregulators working on the details, said in an e-mail. “JPMorgan'srecent circumstances certainly should light a fire under regulatorsto get on with it ASAP.”

For the past year, in part because of public tiffs between Dimonand regulators including Federal Reserve Chairman Ben S. Bernanke,JPMorgan has become the public face of Wall Street's opposition tothe Volcker rule.

While Dimon acknowledged the Volcker rule might have preventedthe trades in question, he stopped short of endorsing the measure.Later in the hearing, he said the rule was “unnecessary” because ofother changes to the banking system, such as higher capital levels,and warned that a tough ban on proprietary trading could restrictaccess to credit.

'Traffic Laws'

“Think of it as traffic laws,” Dimon said. “Some cars should go65. Some shouldn't. Some streets should be different. Some lightsshould be bright. Things should be done right. We have the widest,deepest, and best capital markets in the world. It would be a shameto shed that out of anger.”

The Dodd-Frank Act requires regulators to make rules thatprevent proprietary trading at federally insured financialinstitutions. Volcker and other proponents argued that banks whosedeposits are insured by taxpayers should not be allowed to engagein trading that threatens the stability of the bank and risks agovernment bailout.

The Fed, along with the CFTC, the Federal Deposit InsuranceCorp., Office of the Comptroller of the Currency and the Securitiesand Exchange Commission, have issued proposed versions of theVolcker rule. They haven't yet completed the rule, which is set totake effect July 21.

Dimon highlighted one of the central challenges facingregulators: how to ban proprietary trading without banning hedges.The Dodd-Frank law specifically allows banks to conduct hedgingactivities.

“It's going to be very hard to make a bright-line distinctionbetween proprietary trading and hedging because you could look atalmost anything we do and call it one or the other,” Dimon said.“Every loan we make is proprietary. If we lose money, the firmloses money. If we buy Treasury bonds and they lose money, we losemoney.”

Under questioning from Senator Richard Shelby of Alabama, thetop Republican on the committee, Dimon said that hedges aren't justtools to minimize losses. He said they're also designed to makemoney for the bank.

“Yes, it's supposed to earn revenue,” Dimon said, referring tohedging inside JPMorgan's chief investment office unit, where the$2 billion loss originated. “This particular synthetic creditportfolio was intended to earn a lot of revenue if there was acrisis. I consider that a hedge.”

Hedging 'Boring'

Such a strategy can easily backfire on a bank, said Karen ShawPetrou, a managing partner at Federal Financial Analytics, aWashington research firm.

“Hedging should be boring,” she said. “If they make a lot ofmoney, they could also lose a lot of money and they're not hedges.More importantly, if people engaged in the transaction are rewardedfor those profits and revenues, then they're not being paid tohedge and by definition anything they do is not hedging.”

Dimon said he didn't believe JPMorgan's pay policies “made thisproblem worse” because “none of these folks were paid on aformula.”

The hearing illustrated how the Volcker debate has evolved inWashington. Earlier this year, lawmakers and regulators werefocused on provisions ensuring that banks can still conductmarket-making activities. Since JPMorgan's loss, focus has shiftedto the hedging exemption, said Mark Calabria, an economist and thedirector of financial studies at the Cato Institute inWashington.

“The hedging part is going to get more attention in Volckerbecause it's the more substantive part,” said Calabria, who is alsoa former aide to Republicans on the Senate Banking Committee. “Webasically know what a market maker is. There's so much moresubjectivity about hedging.”

Dimon said he was glad to continue the discussion over theVolcker rule as well as other Dodd-Frank regulations with lawmakersfrom both parties — and would even make arrangements to do it moreoften in person in Washington.

“We'll even get apartments down here,” Dimon said. TheDodd-Frank law “would have been better had there been morecollaboration.”

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