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Senate Democrats Call Volcker Rule Draft ‘Inconsistent’ With Law

WASHINGTON –  Two Democratic senators said Friday that a draft of the Volcker rule is inconsistent with the language of the Dodd-Frank overhaul of the financial system and should be tightened to exclude the kind of trade involved in J.P. Morgan Chase & Co.’s (JPM) $2 billion loss.The language of the Dodd-Frank law clearly intended to prohibit a bank from engaging in the kind of overly-broad hedging at play in J.P. Morgan’s loss, Democratic Sens. Carl Levin of Michigan and Jeff Merkley of Oregon, said in a conference call with reporters on Friday. Merkley and Levin wrote the provision of Dodd-Frank that implemented the Volcker Rule, aimed to stop traditional banks from conducting proprietary trading.A draft proposal of the Volcker rule permitting overly-broad hedging bets should be tightened, they said.”It is inconsistent to create this kind of a major loophole,” Levin said.A proposal for the Volcker rule released to regulators in August, and reviewed by The Wall Street Journal, said hedging could be defined to include banks covering their risk on a “portfolio basis.”The J.P. Morgan trade, which was tied to the bank’s bet on a continued economic recovery, is an example of “portfolio hedging,” that shouldn’t be allowed, the senators said Friday.”This is not a hedge as we defined it in the law,” Levin said. Under Dodd-Frank, hedging is only permitted when it is designed to reduce risks tied to specific assets or positions held by the company, Levin said. “That was not the case here.”The draft proposal would enable banks to “hide any vast amount of proprietary trading,” Merkley added. “The draft rules at this point are way too lax. They do not have the bright lines that are needed.”The senators said it is regulators’ responsibility to make sure the loophole is closed. If not, “we will see the Wall Street community of banks take full advantage of it,” Merkley predicted.The lawmakers said their goal wasn’t to outlaw hedging, just to make sure banks, many of which received taxpayer support during the financial crisis, were not engaged in overly-risky activities.The Volcker rule was designed to ensure there’s a “firewall” between traditional banking and hedge-fund-style investing, Merkley said.When asked if had any message for J.P. Morgan chief executive Jamie Dimon, Merkley said, “if you want to be the head of a hedge fund, be a hedge fund.”Copyright © 2012 Dow Jones Newswires

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