JP Morgan loss: Did US regulators know what CEO Jamie Dimon apparently didn't? (+video)

For decades the agencies that regulate the nation’s major banks have had their own employees imbedded in the banks themselves.

The regulators run regular exams to make sure the banks are playing by the rules. They get the same reports the top officials of the bank receive. And, since many of the regulators are former bankers, they generally know what they are looking for.

So were the regulators on top of the situation at JP Morgan Chase, which announced last week it would lose at least $2 billion in investment bets gone awry?

If or when Congress holds hearings on the Chase losses, that will likely be a key question for lawmakers, assuming they invite the heads of the Office of the Comptroller of the Currency (OCC) and the Federal Reserve Bank of New York to testify.

But considering that the top echelons at JP Morgan might not have known of the impending losses, the answer to that question might not be very satisfactory.

The bank’s loss is a congressional concern because it raises questions about the future implementation of the so-called Volcker rule, part of the financial reform legislation that passed after the collapse of the mortgage market in 2008.

The Volcker rule, named for the former chairman of the Federal Reserve, seeks to prevent a large bank failure (that might require a taxpayer bailout) by prohibiting banks from speculative trading for their own investment account.

JP Morgan’s CEO, Jamie Dimon, has become one of the banking industry’s leaders in arguing against strict rules in implementing the legislation.

“For sure, this JPMC episode will give regulators some backbone in holding firm,” writes Robert Bench, a senior provost fellow at the Boston University Center for Finance, Law & Policy and a former deputy comptroller of the currency in the Reagan administration, in an email.

However, the Volcker rules have yet to be implemented, pointed out the OCC in a statement on Tuesday. “Even if both (the Volcker rule and Dodd-Frank) were assumed to be in effect, the transactions at issue are complex, and whether they would qualify for exceptions under the statute or proposed rule requires careful analysis,” it said.

The regulators, meanwhile, should have had plenty of warning about the problems brewing at JP Morgan, some analysts argue. On April 6th, the Wall Street Journal and Bloomberg News both wrote a story about a Britain-based JP Morgan trader, called the “London Whale” because of his enormous financial positions in the derivatives markets. Derivatives are instruments designed to replicate the price movements of a basket of items such as currencies, commodities or stocks. They can be used by financial companies to hedge their positions.

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