Economics & Finance
May Thu 17, 2012
The U.S. Department of Justice has ordered an investigation on the loss of the financial services firm JP Morgan, which is already being investigated by the Securities and Exchange Commission (SEC). President Obama commented on the events, saying "the risky bets that led JPMorgan to a loss of 2 billion dollars show that the reform of Wall Street is necessary”. Meanwhile, the annual meeting of JP Morgan took place on Tuesday, and Jamie Dimon was confirmed in the dual role of chairman and CEO. The AFSCME union presented a proposal to separate the two charges, saying that without a division of roles, the controlled and the controller are the same thing, but the motion received only 41% of the vote and was rejected. Ilsussidiario.net interviewed Victoria Ivashina, Professor of Finance at Harvard Business School, to ask her to comment on the need for a reform of Wall Street.In your opinion, is the Wall Street reform necessary or not?In black and white, and in general, the answer is definitely yes. The real question is what kind of reform. I do not think there is anybody, including banks, who would say that reform is not necessary. The disagreement is about what kind of reform is necessary. For political reasons, there is a tendency to make things simple, and unfortunately, I do not think there is a simple way of splitting banks, for example, with the Volcker rule, that you can only do x amount of some type of business. I do not think that that kind of rule can actually address the issues that became evident, for example, with the JP Morgan trade. It becomes a matter of definitions. Currently, for example, it is not clear that this example would be excluded by the Volcker rule because this could be considered a hedge. It would be unreasonable to prohibit banks from using any form of derivatives because this is just a matter of risk management and it is completely necessary. The question is, then, how can you possibly be sure that the bank is really doing hedging and not betting or gambling. The issue is to avoid dealing with definitions, which is impossible. I believe the only way around it is to put capital requirements into place, allowing banks to use derivatives, but imposing capital requirements, would be the way to avoid running into matters of definitions.
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