[ by Howard Haykin ]

As we proceed into 2013, the 'handwriting on the Wall Street' is clear: the Volcker Rule, under the Dodd-Frank Reform Act, is a sure thing to begin in the coming year - perhaps becoming effective by the end of the first quarter.  Just one year earlier, in the first months of 2012, the Volcker Rule seemed like a paper tiger.  It was under relentless attacks from Wall Street executives, hired lobbyists and Republican leaders in Congress.  Itt didn't seem possible that the Volcker Rule could withstand the efforts to delay implementation, as well as weakening the eventual Rule by pulling enough sharp teeth from the Rule's onerous restrictive covernants. 

After all, Wall Street and their lobbyists asked, how wise is it to mess around with Wall Street profits, at a time when several countries are fighting for their economic lives, and a misstep by a 'too-big-to-fail" bank could create unmanageable waves or quakes in the fragile global economy.   It's best to stay the course, restore the world's economy, then deal with issues of bank risk when everyone is in a position of strength. 

The Era of Good Feeling Comes to an End.   Actually, the unified attacks on the Volcker Rules suddenly took a detour - or perhaps it was a bump in the road - a very large bump.  Wall Street executives suddenly are silent - particularly, the unofficial spokesman for Wall Street Banks - Jamie Dimon - lost his voice and influence.

The well-oiled machine of Wall Street banks unexpectedly became impotent.  Suddenly, the nation's leading newspapers and news services weren't featuring daily attacks on the Volcker Rule.  Wall Street's powerful executives, well-funded lobbyists, and influential Republican leaders in Congress apparently hit a brick wall - one that was not anticipated.  One that created validity to the fear that a "too-big-to-fail" bank or financial institution could, after all, fail, or at least suffer debilitating losses.ollapse under the wait of its own investments. ional leaders - nothing was prepared for or could overcome the horrific weight o

What Singular Event in 2012 Could Sway a Nation?  Sway the Thinking of World Leaders?   The answer, dear Watson, is elementary.  We're talking about the game-changing "London Whale" trading losses that by JPMorgan Chase's London Office - home of the CIO, or Chief Investment Office. 

It came to light that JPMorgan's "London Whale," an individual nicknamed for his penchant to take on enormous credit derivatives positions on behalf of JPMorganChase, was about to "meet his maker" - i.e., see his long winning streak come to an end.  For at least the past couple of years, the London Whale could do no wrong - except for theoretically exposing JPMorgan to undue risk and enormous liabilities.  Yet, continued to generate enormous profits for the bank - and there seemed no end in sight.

The Whale that Roared (In Anguish).   Finally, the London Whale had met his match.  A group of hedge fund managers identified the Whale's strategy and found holes in his strategy.  Operating as one, the funds took positions that were opposite those of the Whale.  And rather than corner the market, as the Whale had anticipated, the hedge fund bloc cornered the market and forced JPMorgan in to a corner, unable to liquidate its enormous derivatives portfolio. 

The impact was immediate and unrelenting.  JPMorgan Chase early on estimated that total losses would range around $2 billion.  That estimate quickly fell by the wayside, as new irregularities at JPMorgan's London CIIO operation quickly came to light.  Valuations were fraudulently overstated, which led to the more realistic admission that total losses would exceed $6 billion.

Wall Street, government leaders, the nation and the world had seen the "worst case scenario" and it was not pretty.  No longer would we need to rely on hypothetical scenarios.  Unannounced and unforeseeable risks had become reality.  Wall Street's #1 citizen lost face in the public arena;  he no longer "walked on water, no longer possessed unchallenged creditability or "can-do-no-wrong" invincibility.  For a time, Goldman's Lloyd Blankfein appeared to be taking Jamie Dimon's place, but that never really happened. 

And for all intensive purposes, Wall Street banks lost its voice and its cred in the negotiations.  All that was left for them were some folding chairs for them to sit on and watch from the sidelines. 

It's hopeful that the markets will never experience any future events or scenarios that can replicate what JPMorgan Chase experienced with the London Whale trader.  But as trade executions continue to speed up and as greater amounts of money and reputations are put on the line, it's anyone's guess what the outer limit can be.  I just don't want to be too close to the action when things blow up again.  I kinda believe the Internet provides an adequate buffer.  We probably will find out soon enough.

For further details, go to:   [WSJournal, 12/27/12].