A U.S. Senate panel probing the multibillion-dollar trading lossby JPMorgan Chase & Co. plans to unveil its findings at ahearing this year to press regulators to tighten the Volcker rule,according to three people briefed on the matter.

Staff members of the Permanent Subcommittee on Investigations,headed by Senator Carl Levin, have interviewed JPMorgan officialsas well as examiners and supervisors at the institution'sregulator, the Office of the Comptroller of the Currency, said thepeople, who spoke on condition of anonymity because the inquiryisn't public.

One focus of the queries is whether JPMorgan's wrong-way bets onderivatives would have been permitted under regulators' initialdraft of the Volcker ban on proprietary trading, the people said.The lender lost $5.8 billion on the trades in the first six monthsof the year.

Levin of Michigan and Senator Jeff Merkley of Oregon, bothDemocrats, inserted the trading ban into the 2010 Dodd-Frank Act,leaving the details largely up to regulators. The senators havesaid that the JPMorgan loss highlights a loophole in theregulators' draft that would allow banks to continue hedging theirportfolio risks, and they said it should be closed.

Levin “has pride of authorship in the Volcker rule and wants tomake sure it's implemented correctly,” said Joseph Engelhard,senior vice president of Washington-based investment advisory firmCapital Alpha Partners LLC.

The panel's investigators have interviewed OCC officialsincluding Scott Waterhouse, the examiner-in-charge for JPMorgan,and Julie Williams, the agency's chief counsel, and plan to meetwith Comptroller Thomas J. Curry, according to two of the people.Bloomberg News reported Sept. 7 that the committee also has soughttestimony from those who worked in or helped lead JPMorgan's chiefinvestment office.

No hearing date has been set and the committee hasn't settled onwho will be summoned from the regulatory agency or the bank, thepeople said.

Tara Andringa, a spokeswoman for Levin, and Joe Evangelisti, aspokesman for JPMorgan, declined to comment.

The rule, named for its original proponent, former FederalReserve Chairman Paul Volcker, is intended to prevent banks thathave federally insured deposits from trading for their own account.Regulators have struggled to draw a line between proprietary tradesand trades intended to hedge a bank's risk — an activity permittedby Dodd-Frank.

After the bank disclosed its losses May 10, Levin and Merkleysent a letter to five federal regulators urging them to remove“ill-advised loopholes” from the Volcker draft issued in October2011.

'London Whale'

“Last fall's proposed rule ignored the clear legislativelanguage and clear statement of congressional intent and allowedfor so-called 'portfolio hedging,'” the lawmakers wrote on May 17.“Now, in recent days, we've seen exactly what 'portfolio hedging'might mean. This 'JPMorgan Loophole' is big enough to drive a'London Whale' through.”

The letter referred to Bruno Iksil, the French-born trader inLondon who ran JPMorgan's credit-derivatives book and came to beknown as the London Whale because of the size of his bets.

In June, the Senate Banking and House Financial Servicescommittees held hearings on the trading loss that touched on theeffect of the Volcker rule. JPMorgan Chief Executive Officer JamieDimon, who testified before both panels, said the rule might haveprevented the trades. He also said the Volcker rule was unnecessarybecause other changes, including requiring higher capital levels,would reduce risk in the banking system.

Besides the Levin panel, the Securities and Exchange Commission,the Commodity Futures Trading Commission and at least nine otherstate, federal and international enforcement bodies have beeninvestigating the circumstances of the trades. An internal bankreview found that U.K. traders may have tried to hide the size oftheir losses from the bank's leadership.

JPMorgan shares plunged as much as 24 percent in the month afterthe loss was disclosed. They have since erased that decline,closing at $41.25 in New York yesterday.

Mary Miller, Treasury's undersecretary for domestic finance, andMartin Gruenberg, acting chairman of the Federal Deposit InsuranceCorp., have said regulators aim to complete the Volcker rule by theend of the year.

Levin and Merkley are hoping that JPMorgan's troubles willpersuade the regulators to restrict hedging in the final language,said Mark Calabria, director of financial regulations studies atthe Washington-based Cato Institute and a former top Republicanaide on the Senate Banking Committee.

“The Volcker process has been slower than they hoped and it'snot as strong as they hoped,” Calabria said.

Goldman Report

Levin's investigations panel is known for the depth of itsresearch and its bipartisan efforts. The subcommittee probed WallStreet for two years following the 2008 credit crisis, issuing a640-page report that focused on Goldman Sachs Group Inc. and pinnedmuch of the blame on the largest banks for the near-collapse of thefinancial system.

Still, said Engelhard of Capital Alpha Partners, the panel'shearing on the JPMorgan trades would come months after lawmakersand regulators began considering the role of the Volcker rule.

“I'm not sure what impact a hearing will have given how theregulators have already reacted,” Engelhard said.

Bloomberg News

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