Financial lobbyists are bracing for a fresh Capitol Hill battle on financial reform after a $2 billion botched trade at JPMorgan Chase put Wall Street back in the Washington spotlight.
While the nation’s largest bank quickly took steps to contain the damage — officials involved with the trade resigned on Monday — the incident has led to new congressional hearings and reinvigorated a debate over Wall Street that had cooled over the past several months.
The trading debacle has rekindled the core left-versus-right debate on the financial meltdown and Great Recession over the appropriate level of government interference in capital markets.
Lobbyists for the financial industry have spent months meeting with lawmakers and regulators working on the Dodd-Frank financial reform law in an effort to influence the hundreds of regulations in the pipeline.
Now they expect they’ll have to double their efforts.
“Once the dust settles, there will be a need to go back to everybody and re-explain what the industry is for,” said one senior financial-industry executive who asked to remain anonymous.
Democrats are pressing regulators to tighten draft rules on Dodd-Frank, especially on the “Volcker Rule” aimed at preventing banks with federally guaranteed deposits from making risky trades in pursuit of their own profit.
They also used the opportunity to continue their push for bigger budgets for Wall Street’s regulators. President Obama has called for major funding boosts that so far have been stymied by the Republican-led House.
“I think it should build the case for the funding for the [Commodity Futures Trading Commission],” said Rep. Barney Frank (D-Mass.).
Senate Banking Committee Chairman Tim Johnson (D-S.D.) announced Monday that his panel would be holding more hearings with regulators on the implementation of Dodd-Frank, adding that lawmakers will also be discussing the JPMorgan trades.
Republicans have urged caution, saying all the facts must be gathered on JPMorgan before deciding if policy should be changed.
“I’m old-fashioned. I’d like for us to be dealing with reality instead of myth and perception,” said Sen. Bob Corker (R-Tenn.) on CNBC. Corker has called for exploratory hearings on the trades.
Sen. John Thune (R-S.D.) hit the same note one day earlier, in an interview on “Fox News Sunday.”
“We need to make sure we get all of the facts before jumping to conclusions about the need for greater financial regulation,” he said.
Other lawmakers are preparing legislation.
Sen. Bernie Sanders (I-Vt.) announced Monday that he is drafting a bill that would prevent JPMorgan Chairman Jamie Dimon from holding his seat on the board of the Federal Reserve Bank of New York, calling it an “obvious conflict of interest.”
Massachusetts Democratic senatorial candidate Elizabeth Warren also called for Dimon’s ouster from the New York Fed.
Warren, who largely built her reputation on grilling Wall Street, followed that up Monday by launching a petition to bring back the Glass-Steagall Act. The 1930s legislation established a firewall between traditional and investment banking, but was chipped away at and ultimately repealed in 1999. JPMorgan makes a compelling case for its return, she said.
“I don’t think we should just trust Wall Street banks to regulate themselves,” she said on the petition. “I’m calling on Congress to put Wall Street reform back on the agenda.”
Warren is locked in a tight race with Sen. Scott Brown (R-Mass.) that could decide the balance in the Senate. That race alone, experts said, raises the likelihood of new legislation aimed at Wall Street.
At the same time, financial-industry lobbyists said they did not expect any new policies to be approved by the divided Congress.
“You’ll see someone introduce some legislation to toughen up Volcker,” said Gardner. “But nothing’s going to be passed. It’s pure political posturing.
“There will be a lot of grandstanding, but there will be no legislating,” he added.
With Democrats eager for any chance to tie the GOP to Wall Street as Election Day draws near — especially given presumptive GOP presidential nominee Mitt Romney’s background in private equity — don’t expect a staunch defense from Republicans, Gardner said.
“I don’t think anybody wants to be in a position of defending a bank right now,” he said.
Even if nothing of substance happens on Capitol Hill, regulators still hold substantial sway over the final face of Dodd-Frank, as they write rules implementing it. A key question will be how much regulators are swayed by the new developments and ensuing political pressure.
“There’s plenty of cause for concern,” one executive said. “The human instinct here would be for someone to say, ‘Gosh, perhaps we missed something.’ ”
There are, however, reasons for the financial industry to remain optimistic in the face of the trading meltdown.
For one, JPMorgan is not on the brink of insolvency, taking discussions of another politically noxious taxpayer bailout off the table. Furthermore, some are already questioning whether a tough Dodd-Frank would have prevented the high-loss trade.
Backers of the Volcker Rule used the event as evidence a tough rule is needed, but Dimon has indicated he believes the trades would not have been prevented if the rule were in place.
Other segments in the banking industry think the new attention on Wall Street could help their sectors.
Officials at the Independent Community Bankers Association, which represents small community banks, said a high-profile mess at a big Wall Street bank works in their favor.
“It might create more political good will for our message,” said Paul Merski, the group’s executive vice president for congressional relations and chief economist.
“It helps us create the clear distinction between the largest risky complex financial institutions and what community banks do,” he said.