SHAHEEN: IMPLEMENT A STRONG VOLCKER RULE TO PROTECT TAXPAYERS AND INVESTORS

May 24, 2012

(Washington, D.C.) – In the wake of news that trades in complex financial instruments cost JPMorgan Chase more than $2 billion, U.S. Senator Jeanne Shaheen (D-NH) is calling on federal regulators to enact a strong ban on high-risk trading by large commercial banks that are federally insured. Shaheen, who opposed the Wall Street bailout because it lacked accountability for banks, said she is concerned that the draft of this rule currently under consideration contains loopholes that put taxpayers and everyday investors at risk.

The ban on high-risk proprietary trading is commonly referred to as the “Volcker rule,” after one of its chief proponents, former Federal Reserve Chairman Paul Volcker.

“We need to remember the lessons of the 2008 crisis and the bailout. The Volcker Rule provides essential protections for both taxpayers and investors in my state,” Shaheen said. “JP Morgan Chase’s recent losses resulting from trades in complex derivatives are a stark reminder of the need for strong regulation of high-risk trading at our largest banks.  We need a clear, strong rule that protects the stability of our financial system and shields taxpayers from risky financial activities. The American people will not tolerate another bailout.” 

In today’s letter, Shaheen says that the 2010 Wall Street Reform Act clearly intended to wall off high-risk trading from the core banking activities at large, federally insured banks. Shaheen was a cosponsor of the Merkley-Levin amendment to institute the Volcker Rule as part of Wall Street Reform. But the current draft of the rule, as proposed by regulators, would have allowed the kind of trading that led to JP Morgan’s recent losses. 

“It is clear that your proposed rule does not sufficiently prevent this kind of risk from entering our federally insured banking system,” Shaheen writes in the letter. “I urge you to eliminate any loopholes in the Volcker Rule that would allow large financial institutions to take massive bets in the derivatives markets that put taxpayers and investors at risk.  I am fully aware of the aggressive efforts undertaken by large banks, including JPMorgan Chase, to lobby for these kinds of loopholes.  However, the recent losses at JPMorgan Chase show that large banks will take advantage of any regulatory gaps when possible.”

Risky trading by large federally insured banks was at the core of the 2008 financial crisis and presents a danger both to investors and taxpayers. Because of the central role these banks play in our interconnected financial system, a major collapse at one of them can risk a system-wide shutdown of the financial system that would severely impact the investments of millions of Americans and slash available credit for thousands of businesses.  The New Hampshire Retirement System alone has nearly 77,000 active or retired members with a total of $35.3 million in retirement funds invested just in JPMorgan Chase stock.

The full text of Shaheen’s letter to regulators is below:

Dear Messrs. Bernanke, Curry, Gensler, and Gruenberg, and Ms. Shapiro:

JPMorgan Chase recently announced losses expected to exceed $2 billion from risky trades in derivatives markets.  This news provides a stark reminder of the need for strong regulation of proprietary trading – a concept commonly known as the “Volcker Rule” – to protect our taxpayers and our financial markets.  I write to urge you once again to implement a Volcker Rule that clearly prevents this kind of trading at federally insured financial institutions.  Such restrictions are essential protections for both taxpayers and investors in my state, including the New Hampshire Retirement System.

Through the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress clearly intended to wall off high-risk trading from the core banking activities at large, federally insured banks.  This wall, if implemented properly, should help prevent taxpayers from being asked to bail out financial institutions that make high-risk trades.  However, the trades that resulted in the recent losses at JPMorgan Chase would have been allowed under your proposed rule.  It is clear that your proposed rule does not sufficiently prevent this kind of risk from entering our federally insured banking system.

As a cosponsor of the Merkley-Levin amendment to institute the Volcker Rule and an opponent of bailouts in 2009, I urge you to eliminate any loopholes in the Volcker Rule that would allow large financial institutions to take massive bets in the derivatives markets that put taxpayers and investors at risk.  I am fully aware of the aggressive efforts undertaken by large banks, including JPMorgan Chase, to lobby for these kinds of loopholes.  However, the recent losses at JPMorgan Chase show that large banks will take advantage of any regulatory gaps when possible.

These trades raise serious concerns for individuals who expect their savings and investments to be managed with care.  The New Hampshire Retirement System’s (NHRS) nearly 77,000 active or retired members expect security and stability from their retirement plans.  As of June 2011, NHRS’s fifth largest stock holding was in JPMorgan Chase, for a total of $35.3 million.  Investors in large financial institutions deserve a strong Volcker Rule to ensure that the banking system will be stable.

I urge you to develop a clear, strong rule that protects investors from disastrous losses and shields taxpayers from risky financial activities.  Americans everywhere are still feeling costs of the 2008 financial crisis.  We should not forget the lessons of that crisis.  We cannot afford to let high-risk trading continue to occur at federally insured institutions. 

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