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Why the White House Is Sweating JP Morgan

The Wall Street Journal has an intriguing story today about the anxiety in the White House over $2 billion-and-counting loss that JP Morgan announced last week. At first blush, the reason for the angst isn't entirely clear. After all, the loss would seem to strengthen the case for financial reform, which, as it happens, the president signed into law two years ago, and which Mitt Romney opposes. To the extent that JP Morgan revives the debate over financial reform, it would seem to benefit Barack Obama. 

But, alas, the issue is more complicated than that. In particular, the transaction appears to have been a type of proprietary trade—which is to say, a trade that a bank undertakes to make money for itself, not its clients. And these trades were supposed to have been outlawed by the “Volcker Rule” provision of Obama’s financial reform law, at least at federally-backed banks like JP Morgan. The administration is naturally worried that, having touted the law as an end to the financial shenanigans that brought us the 2008 crisis, it will look feckless instead. As the Journal reports:

In this year's election, the president's advisers want to champion tougher Wall Street regulations passed in 2010, and worry the argument could be diminished if elements of the law—including the "Volcker rule" restricting speculative investments by banks—end up looking weak.
White House and Treasury officials are still determining whether the Volcker rule would have prevented the losses at J.P. Morgan, people familiar with the discussions said. Some of the president's political advisers are concerned that the J.P. Morgan trades, even if determined to violate the spirit of the rule, might slip through the regulatory net.

But it turns out that there’s an additional twist here. The concern for the White House isn’t just that the law could look weak, making it a less than compelling selling point for Obama’s re-election campaign. It’s that the administration could be blamed for the weakness. It’s one thing if you fought for a tough law and didn’t entirely succeed. It’s quite another thing if it starts to look like you undermined the law behind the scenes. In that case, the administration could look duplicitous, not merely ineffectual. And that’s the narrative you see the administration trying to preempt: 

In a sign of the political sensitivity of the issue, members of the president's National Economic Council and the Obama campaign's economic policy team discussed J.P. Morgan and the Volcker rule this week. NEC Director Gene Sperling has also called lawmakers in recent days to try to assuage concerns among Democrats that regulators could weaken the rule. …
White House spokeswoman Amy Brundage said on Wednesday, "It is because of the president that the Volcker rule is a part of the law, and our administration has worked since the day it passed to ensure it and the entire law is implemented in a tough and effective way so that taxpayers never again have to bear the burden of risky behavior on Wall Street."

What’s going on here is this: When the Volcker Rule was wending its way through Congress, several reformer types, chief among them Senators Jeff Merkley and Carl Levin, were adamant about writing tough language into the law that would leave the banks as little wiggle room as possible. But Treasury pushed back on this, arguing that the regulators who would enforce the law were in a better position to hash out the details. Treasury believed it could work with these regulators to write rules that would stamp out the riskiest activities while still allowing certain legitimate transactions that benefit bank customers. As one aide who helped craft the Merkley-Levin version of the Volcker Rule told me while I was researching my recent book:

If you look at the Dodd bill [the bill that eventually passed], Treasury is given the ability to write whatever they want care of the council [of regulators]. If you’re in Treasury’s shoes, and looking at the Dodd version [of the Volcker Rule] versus ours, the Dodd version gives you whole lot of power. Our version doesn’t. 

The problem with all this is that the process by which Treasury and the regulators hash out the rules is rarely a platonic exercise. In fact, it’s often far shadier than anything that goes on in Congress. 

When a bill targeting an industry is pending on Capitol Hill, the industry has enormous advantages: Generally much more money than supporters of the bill, and more knowledge and expertise than the average congressman or voter. But at least the mainstream media covers congressional fights. That means the public can theoretically be rallied and congressmen theoretically shamed into holding the line. No such dynamic exists for the regulatory rule-making process, unfortunately, when pretty much the only people paying attention are industry officials and their lobbyists. Generally speaking, the more leeway Congress gives regulators, the more influence industry is likely to have over the final outcome.

Which is to say, whether or not Treasury intended the Volcker Rule to be tough (and many in Congress believe they did intend this), by taking power away from Congress and claiming it for itself and the regulators, the administration created a situation in which the rule was likely to be weakened. That’s what Democrats in Congress are starting to grumble about. That’s the narrative the administration desperately wants to defuse. And that’s why the White House is now in damage-control mode on Capitol Hill.  

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