Geithner: JPMorgan losses strengthen need for financial sector reforms
WASHINGTON - US Treasury Secretary Timothy Geithner Tuesday said the JPMorgan Chase's $2 billion losses on the derivatives market make a "very powerful case" for the Dodd-Frank financial reform law.
Describing it as an example of "bad management," Geithner said the circumstances leading to the losses "strengthen the need for reforms" in the financial sector.
"This failure of risk management is just a very powerful case for reform, for financial reform reforms we still have ahead and the reforms we've already put in place," Geithner said, speaking at the Peter G. Peterson Foundation's third annual Fiscal Summit in Washington, D.C.
The treasury secretary reassured the audience that in light of JPMorgan Chase's huge losses, regulators would be focusing their attention on improving financial regulations, including a "broader set of safeguards and reforms" other than the Volcker rule which is still being drafted.
"The test to reform is not whether you can prevent banks from making mistakes errors of judgment or risk management. That's going to happen, it's inevitable," said Geithner. "The test of reform should be do those mistakes put at risk the broader economy, financial system, or the taxpayer?"
He argued that the best way to prevent putting the nation's economy at risk as the result of one management decision is to force banks to hold more capital against risk and ensure that the financial system has "better cushions" against unavoidable mistakes on Wall Street.
The Treasury secretary said the executive branch has "tools" that can push back the deadline for raising the debt limit until early 2013, even though the government will hit the ceiling before the end of the year.
Geithner's comments echo those made by other White House officials, who have refrained from blasting the bank for its bad investment, and instead used the event to bolster the case for the financial overhaul.
Geithner also told moderator David Wessel of the Wall Street Journal that he had not spoken to JPMorgan Chase CEO Jamie Dimon since "the incident."
Dimon has come under intense fire since it was revealed last week that his company had lost $2 billion in risky hedging trades.
Meanwhile, according to two senior executives of JPMorgan who declined to be identified, the biggest U.S. bank is considering reclaiming incentive pay from employees, including former Chief Investment Officer Ina Drew, after her unit's trading loss.
JPMorgan's solvency is not expected to be at risk due to the trade, but Geithner called the substantial loss "definitely a risk-management failure."
He added that regulators, including the Securities and Exchange Commission and the Federal Reserve, are closely examining how the trade occurred.
"They're going to take a very careful look at this," he said.
Geithner has said last year's months-long debate between the Obama administration and Congress over raising the debt limit hurt the U.S. economy and was avoidable.
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