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Meet the Harvard Professor Trying to Kill the Volcker Rule


Who is Hal Scott, the apparent lead general of the Jamie Dimon-led army fighting against financial regulation?

MINYANVILLE ORIGINAL Few people have fought the Volcker Rule harder than JPMorgan Chase (JPM) CEO Jamie Dimon. That much is well known. What's less obvious are the lengths to which Dimon and others have gone to in their efforts to block bank regulations, which include supporting a -- depending on your perspective -- charity-slash-lobbying vehicle; in essence, a private army, led by a de facto general, Harvard Professor Hal Scott.

But first, some background.

Whether or not the type of trading the Volcker Rule is intended to stop caused the financial crisis of 2008 (the law's authors say it did, others blame different variables), it was a factor in JPMorgan's recent $2 billion (and possibly as much as $7 billion) loss.

Was the trade put on by the bank's chief investment office, or "CIO," a bet or a hedge? That depends on your interpretation of section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly known as the Volcker Rule for the former Fed Chairman who proposed that banks not be permitted to speculate with customer funds.

To Peter J. Wallison, the Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute, it's all a matter of perspective.

"The problem is that, operationally, hedging is virtually indistinguishable from proprietary trading (also occasionally labeled "speculation") which is specifically prohibited by the Volcker rule," Wallison recently wrote in American Banker. "Whether a trade or a series of trades is a hedging transaction -- an effort to reduce risk that the bank has already taken on -- or a proprietary trade, a new risk that the bank is putting on its books, can only be determined by a full understanding of the bank's risk position."

Marcus Stanley, policy director for Americans for Financial Reform, subscribes to another point of view.

"That investment office was sold to regulators as a hedging operation, but what it in fact was, was an in-house hedge fund," he's quoted as saying in American Banker. "What that fund was doing was running speculative spread trades that were absolutely designed to generate a profit."

Perhaps most succinct is the pseudonymous Tyler Durden of Zero Hedge, who dispensed with the debate altogether, writing on his blog, "At the end of the day, the real question is why did JPM put in so much money at risk in a prop trade because we can dispense with the bulls**t that this was a hedge, right?"

However one sees it, Lawrence G. Baxter, a Professor of the Practice of Law at Duke University who focuses on financial services regulation (and a former Wachovia (WFC) executive), tells me that JPMorgan's recent loss changed -- at least for now -- the conversation.

"Volcker got a massive boost, and so did regulation in general, because Dimon and JPMorgan were the only credible counterargument out there," he says.

Considering that the CIO booked a profit of $5 billion in 2010 -- equal to more than 25% of JPMorgan's net income for the year -- it stands to reason protecting it would be a priority. Much has been made of Jamie Dimon's crusade to eviscerate the Volcker Rule, not to mention his feelings about Volcker himself. He stated in February, "Paul Volcker by his own admission has said he doesn't understand capital markets. He has proven that to me."

Indeed, before news broke of the JPMorgan loss, opponents of the Volcker Rule could simply point to Mr. Dimon, under whose leadership JPMorgan managed to avoid the sort of meltdowns suffered by venerable names like Citigroup (C) and Bear Stearns while still managing to boast the most assets and the highest profit of any bank in America. He also unleashed a massive lobbying.

The company's officials have visited Washington 72 times since 2010 to argue against Dodd-Frank out of 110 total visits by banks over the same period, including, among others, Goldman Sachs (GS), Bank of America (BAC), and State Street (STT).

However, less is known about the team Dimon has managed to marshal against potential trading restrictions. And one man in particular has taken on a key role.

"Few university professors have more vigorously criticized Dodd-Frank and its Volcker Rule than Prof. Hal S. Scott of Harvard Law School," Bart Naylor, Financial Policy Advocate at consumer rights group Public Citizen, and former Chief of Investigations for the US Senate Banking Committee, tells me in an email.

So, who is Hal Scott?

Hal Scott is the director of the Cambridge, Massachusetts-based Committee on Capital Markets Regulation, an "independent and nonpartisan 501(c )(3) research organization dedicated to improving the regulation of US capital markets." Though tax records show he spends 30 hours a week on CCMR business – for which he is paid $342,840 annually, he is also employed as the Nomura Professor and Director of the Program on International Financial Systems at Harvard Law School, where he has taught since 1975. (Scott's Harvard income has not been disclosed, though the New York Times pegged the average full-time Harvard professor's salary at $191,200 in 2010 -- substantially less than what he earns running the CCMR.)

The CCMR website lists six visits to Capitol Hill by Scott since 2007, arguing against the Volcker Rule in at least three of them. (Jamie Dimon himself has visited regulators no fewer than 10 times since October, 2010 to discuss Dodd-Frank -- three of them specifically about the Volcker Rule.) On the anniversary of the approval of the Volcker Rule in July, 2011, Scott testified to the Senate Banking Committee: "As I have emphasized many times, proprietary trading was not a cause of the financial crisis and can serve to make banks more financially secure by diversifying their activities beyond risky lending."

No positions in stocks mentioned.
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