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Dodd-Frank law: Too big to succeed

A sign for Wall Street is shown near New York Stock Exchange.  |  AP file photo

A sign for Wall Street is shown near the New York Stock Exchange. | AP file photo

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Updated: June 16, 2012 8:08AM

Anyone who thought that Washington had cured the fiscal ills of the 2008 financial meltdown must be wondering what the hullabaloo about the JPMorgan Chase financial-deal-gone-wrong is all about.

After all, the 2,300-page Dodd-Frank Wall Street Reform and Consumer Protection Act was passed by Congress to reassure us that the wisdom of regulatory government would protect us from the marauding ways of the cowboy financiers on Wall Street.

But the $2 billion bad bet in no way endangers JPMorgan, much less the national economy. That’s a lot of money, but it’s only a ripple in the firm’s ocean of $2.3 trillion in assets, according to Reuters. What it did was expose the wizard behind the Dodd-Frank curtain as a fraud in ending too big to fail.

As far as I can make out from press reports, JPMorgan had made some big loans that it had become concerned were at risk of default. So it made investments to hedge that risk. Then, things suddenly didn’t look so bad for those loans, so the firm made further trades to protect itself if the default risks fell, in effect hedging against its first hedge.

I’m sure in the world of high finance, all that makes cents and dollars but it has us mere mortals scratching our heads trying to make sense out of it, especially since it ended badly. Still it would be nobody’s business but that of JPMorgan’s investors were it not for the fact the firm is a commercial bank holding federally insured deposits, meaning taxpayers could be on the hook for depositor losses. A key question is whether the trading would have violated the Volcker rule if the rule were in effect — it’s not because regulators are still figuring out what it is supposed to be under the vague 2010 Dodd-Frank law.

The rule, named for former Fed chairman Paul Volcker, is aimed at preventing commercial banks from doing risky trading that endangers depositor funds. The fine point here is whether JPMorgan was engaging in risky trading for speculation, which would be prohibited, or risky trading to hedge, which apparently would not.

That sounds a lot like a difference without a distinction. Dodd-Frank defenders blame nefarious lobbyists hired by wicked Wall Streeters for the confusion and failure to resolve the issue.

Curiously, this was not a problem under the Depression-era Glass-Steagall Act separating commercial and investment banks, but it was repealed in 1999. After the 2008 meltdown, rather than go back to the clear language of that law, Congress seized on the crisis to meddle in banks small as well as large, credit card dealings, bank fees and anything it could sweep under the title of reform and consumer protection.

It was done in the name of ending too big to fail. But since 2008, big banks have gotten bigger. Richard W. Fisher, president of the Federal Reserve Bank of Dallas, has upset the titans of big finance and the potentates of big government by stating the obvious — these institutions are so huge that Washington would have little choice but to come to their rescue in another crisis.

Fisher makes the common-sense observation that the biggest banks must be broken up or limits placed on their trading. But breaking up the banks would rob government of the excuse to lord over them through the regulatory state. Breaking them up would deny the big banks their enormous financial clout and the implicit taxpayer bailout. There you have the love-hate embrace of big government and big business.

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