That the losses would only dent the quarterly profits at one of the world’s largest banks, and that they were revealed by the bank’s own management, did not diminish the chorus on Capitol Hill for tighter controls. The charismatic and often outspoken Dimon, who has argued rigorously against strict financial regulations, fielded calls Friday from several lawmakers and regulators at the bank’s Midtown Manhattan headquarters.
The biggest blow-up between Wall Street and Washington since 2010, when Congress passed the Dodd-Frank Act to tighten oversight of the financial industry, comes just as regulators are drafting new rules governing banks. A signature feature of the law is the Volcker Rule, a prohibition on banks engaging in speculative bets. The authors of the act say the measure might have prevented JPMorgan’s bad trades had it been in effect.
“The argument that financial institutions do not need the new rules to help them avoid the irresponsible actions that led to the crisis of 2008 is at least $2 billion harder to make today,” Rep. Barney Frank (D-Mass.) said.
The $2 billion loss — made by a Britain-based trader known as the “London Whale” because of the size of the bets he placed – was unlikely to make a major difference to the finances of JPMorgan, which earned $19 billion last year.
JPMorgan’s shares lost more than 9 percent of their value Friday.
Lawmakers suggested that Dimon was facing a type of poetic justice after he used the credibility he established before and during the credit crisis — when he avoided excessive risks and scooped up dying firms — to lead the fight against strict financial regulation.
Just last week, Dimon captained a group of top bankers in slamming Dodd-Frank provisions in a private meeting with top Federal Reserve officials in New York.
“We’ve got a situation where he has favored the repeal of Dodd-Frank,” said Sen. Carl Levin (D-Mich.). Dimon’s positions “have been dramatically proven to be wrong in this recent $2 billion loss.”
Republicans also weighed in Friday, with Sen. Bob Corker of Tennessee calling for a congressional hearing into the JPMorgan losses to question whether “taxpayers are fully protected from losses at major financial institutions.”
Dimon made no public comments Friday, spending much of his time, along with other senior executives, talking to officials in Washington about the trades. But in disclosing the losses Thursday evening, the bank chief insisted that the bank caught the mistakes that led to the losses and took action to fix the problem.
“These were grievous mistakes, they were self-inflicted, we were accountable, and we happened to violate our own standards and principles by how we want to operate the company,” he said. “It violates the Dimon principle.”
Still, he acknowledged that the $2 billion loss “plays right into the hands of a whole bunch of pundits out there.”
A banking-industry source, who spoke on the condition of anonymity to talk frankly, said the JPMorgan error would limit the ability of Dimon — Wall Street’s best spokesman — to be an advocate for the industry in the future.
The bad trades that caused JPMorgan’s loss recalled the type of complex, highly speculative strategies that helped to nearly crater the banking industry in 2008 — before taxpayers stepped in to bail it out.
In this case, the trader in London tried to “hedge,” or protect against, corporate bonds and loans owned by JPMorgan.
But instead of simply selling those bonds and loans, the trader engaged in a series of extraordinarily complex transactions, buying and selling other specialized investments, to protect the bank if the bonds and loans lost value. The web of investments proved too complex, creating risks the bank did not anticipate.
Dimon said the bank’s loss could go beyond $2 billion but suggested that it would not have any lasting damage on the firm’s finances. In this quarter, including the loss, JPMorgan might still make a profit of $4 billion, Dimon said.
The nature of the bets, though not the extent of the losses, became known earlier this year. At the time, Dimon called the concerns that had started bubbling up in the media a “tempest in the teapot.”
Now, JPMorgan is not only facing the outrage of lawmakers but also intense regulatory scrutiny. The Securities and Exchange Commission, the Federal Reserve and British regulators are all looking into the problematic trades.
“I think it’s safe to assume that all of the regulators are focused on this,” SEC Chairman Mary L. Schapiro said Friday.
Beyond JPMorgan, banking lobbyists say they will face a tougher task in efforts to soften financial regulation. “I think it’s practically a sure thing that the pressure from Congress . . . on regulators is going to intensify,” said one banking-industry lobbyist. “The industry is going to have to deal with that.”
Financial analysts say that with regulators likely to produce tougher rules, JPMorgan’s mistake may ultimately weigh on the profits of Wall Street.
“The big banks will be unable to turn to Congress for help, and the hard-liners now have more ammunition to press for a tougher rule that could hurt the profitability of market making [units],” wrote Guggenheim Securities analyst Jaret Seiberg in a research note.
The most contentious of the regulations is the Volcker Rule. The rule prohibits banks from speculating with their own money — rather than on behalf of their clients — but firms argue that the dividing line can be hard to define.
“If you want to be trading, you have to have a lawyer and a psychiatrist sitting next to you determining what was your intent every time you did something” to follow the Volcker Rule, Dimon told CNBC this year.
At a Senate hearing Wednesday, former Fed chairman Paul Volcker, the intellectual father of the rule, offered a full-throated defense.
“Proprietary [speculative] trading is not a necessary ingredient of bank profits. It’s a very volatile ingredient of bank profits,” he said. “You know, I think it’s appropriate that all the money that was made on trading in this century by banks up until 2007 disappeared in 2008, which gives you a sense that this is not a risk-free business.”
Sheila Bair, the former chairman of the Federal Deposit Insurance Corp. who pushed for aggressive financial reforms, said in an interview that the JPMorgan case revealed a fundamental question.
“It reinforces the question of whether these banks are too big to manage,” she said. “Are these financial institutions too big and too complex for anybody to manage?”
Staff writers Brady Dennis, David Hilzenrath, Brad Plumer and Suzy Khimm contributed to this report.