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May 18, 2012

Lessons From Trades Big and Bad

Too big to hedge.

That may be the lesson of the debacle at JPMorgan Chase. And if regulators take the lesson to heart, they could close a gaping loophole in the Volcker Rule, which is supposed to ban speculative trading by banks that take insured deposits.

When he disclosed a $2 billion trading loss last week, Jamie Dimon, the chief executive of JPMorgan, said the trades were intended to hedge the firm’s credit exposure — that is, reduce the risk of investments it had made. This week, speaking to shareholders, he modified that, saying: “What this hedge morphed into violates our own principles.”

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