JPMorgan Chase & Co. has given financial reformers at least two billion reasons to insist on more aggressive oversight of the banking industry. In the wake of last week's trading loss, presidential contender Mitt Romney and other Republicans will have to rethink their rhetoric around gutting the Dodd-Frank Act – and more specifically, its Volcker Rule provision. Voters may no longer believe that big banks can manage their own risks, which leaves making banks smaller the alternative to tighter regulation.
JPMorgan chief executive Jamie Dimon reiterated over the weekend that the bank's loss at its chief investment office came from mistakes made hedging its loan portfolio. The trading led to more – not less – risk. But portfolio hedging isn't the sort of activity limited by the Volcker Rule, which is meant to prevent banks from betting with capital secured by customer deposits. Still, that hedging went awry. While the bank's capital can handle the hit, the episode has critics rightly complaining that even a bank as seemingly bulletproof as JPMorgan is too complex to manage its own risk.
And that presents a political problem. Mr. Dimon has been outspoken about the flaws of Dodd-Frank, and Republicans have largely nodded in agreement. Presidential hopeful Mitt Romney has promised to repeal much of the 2010 law if elected. This episode shatters that strategy. The GOP shift may already have begun. On Friday, Senator Bob Corker called for a hearing to learn more about JPMorgan's loss and what such mistakes mean for taxpayers. As recently as February, he was pushing to weaken the Volcker Rule.
Republicans will need to come up with a strategy to end "too big to fail" without increasing the government's footprint in finance. If embracing Dodd-Frank is not an option, do not be surprised to see many in the party adopt a more radical idea, and one embraced by Dallas Fed president Richard Fisher: breaking up the banks.