Written by Ari Kassutto
Edited by Sarah Mejia
On October 15th the Wall Street Journal reported that JP Morgan Chase agreed to pay a $100 million fine to the Commodity Futures Trading Commission (CFTC) for the ‘London Whale’ debacle in 2012. The fine comes from new powers Congress appointed to the CFTC from the Dodd–Frank Act in 2010 following the financial crisis. Dodd-Frank permits the CFTC to fine banks for reckless activity without having to prove intent of wrong doing. The Whale clearly demonstrates reckless trading, as JP Morgan lost over $6 billion from trading risky security swaps in massive excess. This would be the first fine imposed by the CFTC from its new Dodd-Frank provisions.
This agreement could be a landmark case, showing all banks that they will now be penalized for all reckless trading. Banks will likely trade more carefully now, but reckless trading is inevitable. This fine shows all banks that reckless trading can still produce profit even after regulatory fines have been invoked. In this case, JP Morgan lost money, but this blow represents virtually nothing, as the bank set aside over $23 billion in its third quarter this year, to “absorb future settlement and lawsuits” (Patterson).
This new Dodd-Frank provision gives banks a new incentive to act in the best interest of the economy and not make risky trades. However, for the banks that refuse to play by the rules, Dodd-Frank only represents another operating expense which can easily be incorporated into their budget. Dodd-Frank is a good start to modern regulation of banks, but this agreement clearly shows that the CFTC does not have enough power to penalize banks to the point of inciting fear in future trading. The leading banks remain multiple steps ahead of the regulatory agencies even with these new provisions. The division of power and the conflict of interest between all the regulatory agencies seem to be hurting their ability to actually regulate. Perhaps the division of regulatory power is too far stretched, and combining these agencies could prove helpful to controlling future reckless activity.
JP Morgan did an excellent job containing this fiasco and protecting its stakeholders by setting aside the $23 billion as a buffer. JP Morgan will likely continue to trade recklessly, seeing that it would only have to pay a miniscule fine compared to profit to be made from market manipulation. If regulators had the power to implement a substantial punishment on banks, perhaps the banks will find a real incentive to play ball. As for now JP Morgan is free to make selfish, risky trades, knowing the company only receive a slap on the wrist if caught.
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Patterson, Scott. “J.P. Morgan to Pay $100 Million in CFTC Pact on ‘whale’ Trades.” Wall Street Journal [New York City] 15 Oct. 2013: n. pag. Wsj.com/J.P. Morgan to Pay $100 Million in CFTC Pact on ‘whale’ Trades. Oct.-Nov. 2013. Web.