Sen. Durbin: JPMorgan ‘gambling with taxpayer insured money’

Senate Majority Whip Dick Durbin (D-Ill.) on Tuesday blasted JPMorgan Chase over its $2 billion loss in a risky trade, saying that the institution had been “gambling with taxpayer insured money” and suggesting that the bank may have violated the language of the draft Volcker Rule.

“When the folks at Chase decide to invest money, they are gambling with taxpayer insured money and what it boils down to is when $2 billion are lost it just isn’t a loss for stockholders or the investors, it’s a potential loss for the American taxpayers and middle income families,” said the number two Democrat in the Senate on “CBS This Morning.”

Durbin said JPMorgan’s losses should add pressure for the implementation of the Volcker Rule, which would limit the ability of banks to use their own funds to engage in high-risk trades.

“Why don’t we go forward with the Volcker Rule, and let me clear the air here, the Volcker Rule is not in effect and won’t be for several weeks, in July. The Volcker Rule says banks shouldn’t be engaged in proprietary trading that could in fact endanger their capital positions and call for government support as we had in the last bailout,” he said.

Durbin called the rule “a sensible step forward for more accountability and more transparency.”

Asked by CBS host Charlie Rose if the trade would have been “illegal” under the rule, had it been in effect, Durbin responded, “I think so.”  

“I’ll tell you why I hedge this,” said Durbin. “Because we’re not sure if this was a so-called proprietary trade. In other words, was the bank trading its own money or its clients’ money. If it was trading its own money, yes, it would be affected by the Volcker Rule and what we want in that situation is to limit that exposure because if a bank goes south, goes down, we know that ultimately it’s the taxpayers, middle-income families that end up holding the bag, because we’ve lived through this movie before.”

Durbin said some of JPMorgan CEO Jamie Dimon’s own remarks had let him to look more closely at whether the trade in question would have been barred under the Volcker Rule’s language.

“It seems like something Jamie Dimon said led us to that conclusion. But in all fairness let’s get all the facts out. The regulators are looking at this carefully, let’s find out exactly what occurred. 

Democrats have leapt on the losses at JPMorgan to hammer on the need for closer regulation of Wall Street. Bank CEO Dimon, was a vocal critic of the Dodd-Frank financial reform law and the Volcker Rule. 

Republicans though have warned that increased regulations may stifle business growth and have cautioned against using JPMorgan’s missteps to further government oversight of Wall Street.

The Illinois senator accused GOP lawmakers of hampering efforts to empower regulators. 

“The Republicans in Congress have got to stop their effort to slow down this reform and to starve out the agencies responsible for reform,” he said.

“We’re writing rules and regulations based on the Dodd-Frank law, the Volcker Rule would go under effect at the end of July and what we’ve seen in Congress is an effort to short-change the Securities and Exchange Commission, the Commodities Futures Trading Commission, so they don’t have the resources and personnel to write these rules and regulations,” Durbin alleged.

The JPMorgan botched trade though has placed many Democrats, in particular President Obama, in a difficult position. Obama has pushed for Wall Street reform, defending the Dodd-Frank overhaul from Republican and banking industry critics, while also relying on the financial sector to contribute to his re-election drive. On Monday, Obama raised money at the New York home of investment fund Blackstone Group ‘s Chief Operating Officer Tony James.

Durbin defended the Democrats approach to Wall Street, saying tighter regulations could protect taxpayers without handcuffing the financial sector.

“There’s no question that banks are in business to  be profitable, to make money, what we are trying to stop or slow down is what a former chairman called “irrational exuberance” when they are betting a $100 billion on credit default swaps as this whale figure did with Chase,” Durbin said. “There were others betting against him: they won, he lost. So the question is: Is there a profit, is there an unreasonable level of profit-taking that creates too much risk? That’s what good managers need to decide every day.”

Asked about Obama’s continued fundraising on Wall Street, Durbin said he was “in favor of public financing.” 

“I think Citizens United decision by the Supreme Court was a travesty. The amount we are going to spend on both sides of this election is not going to be a source of great pride at the end of the day,“ he said.