J.P. Morgan’s bad bet sparks firestorm over regulation

May 12, 2012 at 12:00a.m.

McClatchy Newspapers

WASHINGTON

J.P. Morgan Chase & Co.’s stunning after-hours announcement Thursday of a $2 billion loss on a complex bet sent shock waves through the nation’s capital Friday, as lawmakers blamed financial regulators for continuing to allow the same risky activity that nearly sunk the global financial system four years ago.

J.P. Morgan had been considered the healthiest of U.S. banks, emerging from the 2008 crisis largely unscathed. CEO Jamie Dimon, boyishly handsome with a thick New York accent, often is referred to as “the king of Wall Street.”

But on Friday, investors humbled the king, sending the bank’s share price down by $3.78, or 9.28 percent, to $36.96. Other big-bank stocks sunk as well.

The massive blunder on the part of a bank perceived as the nation’s healthiest also cast an unwanted spotlight on the same federal regulators found to be asleep at the switch in the run-up to the 2008 financial crisis.

In the aftermath of that crisis, the Federal Reserve was given greater supervisory responsibility for large investment banks, which had transformed themselves into bank-holding companies in order to enjoy greater taxpayer support amid the crisis. Fed staffers now are located in the biggest banks and were supposed to be policing their risk-taking to protect the financial system.

“We can’t discuss supervisory information,” said Barbara Hagenbaugh, a Fed spokeswoman.

The Securities and Exchange Commission also was given greater powers to ensure that large banks properly disclosed risks from complex investments to their investors. Lawmakers said that J.P. Morgan did not fully disclose the risks from its soured bet in its annual report for 2011 or its report filed for the first quarter of 2011.

“It ought to be a concern to the SEC. They are the ones who ought to have a concern about that,” Sen. Carl Levin, D-Mich., said in a conference call with reporters. “The SEC should surely take a look at it.”

Levin heads the Senate’s Permanent Subcommittee on Investigations. His panel was instrumental, after the fact, in piecing together much of the malfeasance that led to the financial crisis. On Friday, though, Levin called it premature to determine whether he’ll conduct hearings on J.P. Morgan.

The SEC regulates broadly on investor protection, but it narrowly regulates J.P. Morgan’s broker-dealer operations, and the losses appeared to be in an area of the bank regulated by the Fed. SEC spokesman John Nester declined to comment.