Volcker Rule Untenable? Analyst Says JPMorgan’s Failed Hedge Is Proof

American Enterprise Institute scholar and former White House counsel Peter Wallison says JPMorgan’s $2 billion trading blunder is not a reason to break up large banks.

In the immediate aftermath of last week’s $2 billion trading loss, both conservative and liberal voices have been heard calling for tighter regulation, but Wallison, in an interview with AdvisorOne and in a recent blog post, is swimming upstream amid the clamor to implement the Volcker Rule.

The Volcker Rule, a controversial part of the Dodd-Frank financial regulatory overhaul that is to take effect beginning in July, bans proprietary trading by commercial banks. But Wallison, who served as general counsel to the U.S. Treasury in the 1980s, says the JPMorgan incident “demonstrates that the Volcker rule is unworkable because you can’t tell the difference between a hedging strategy [which the Volcker Rule allows] and proprietary trading.”

The Obama administration today called for tighter, though unspecified, regulation of banks, and Wallison’s AEI colleague John Makin, in a separate blog post, said the JPMorgan trade indicated the necessity of implementing the Volcker Rule. (Makin could not be reached by AdvisorOne.) Former FDIC chairwoman Sheila Bair, an appointee of former President George W. Bush, told the Wall Street Journal Friday that regulators drafting Volcker Rule regulations should tighten the definition of hedging.

But to Wallison, all of this misses the point. “You can’t write a regulation that will instruct banks to hedge, which they’re required to do and allowed to do” and at the same time ban speculation because “it’s very hard to tell the difference,” Wallison told AdvisorOne.