12/05/2013 10:56 am ET Updated Jan 23, 2014

Wall Street About To Be Hit With A Rule It Hates, Thanks To JPMorgan

If Wall Street were Santa Claus, JPMorgan Chase would get nothing but coal in its stocking this year.

That's because America's biggest bank is partly, if not mostly, responsible for the fact that U.S. financial regulators will soon clap some fairly strong fetters on big banks, The Wall Street Journal reported on Thursday (subscription only). Regulators are reportedly expected to soon approve a tough version of what is known as the "Volcker Rule," part of the Dodd-Frank financial-reform act, which prohibits banks from proprietary trading, which is fancy talk for "gambling with their own money."

Under constant pressure and whining from Wall Street, regulators were originally planning to leave a big loophole in the Volcker Rule by letting banks do what's known as "portfolio hedging," the WSJ writes. This is basically proprietary trading by another name, because it lets banks claim that any kind of trading they do is hedging against losses somewhere in their massive, multi-trillion-dollar portfolios. "We are a bank! We make loans! Therefore we must buy up a kajillion dollars in credit-default swaps! For hedging!"

Then JPMorgan came along and completed the most dramatic portfolio-hedging fail in recent memory, known as the "London Whale" debacle. In a profit-chasing trade thinly disguised as a hedge, the bank bought up a kajillion dollars in credit-default swaps and then promptly lost more than $6 billion. Whoopsie!

Hey, wait a minute, regulators basically said, this right here appears to be a perfect example of why portfolio hedging is not so great after all. It's an idea that Gary Gensler, the head of the Commodity Futures Trading Commission, had been pushing all along. JPMorgan CEO Jamie Dimon had been leading Wall Street's push in the other direction. Ironically, Dimon's own bank gave Gensler all the ammunition he needed to win the fight.

A tough Volcker Rule could have saved JPMorgan from its London Whale embarrassment, and now Wall Street will get a tough Volcker Rule, assuming regulators follow through and enforce it (admittedly a big assumption).

You'd think Wall Street would be happy about this, being saved from future disasters and all, because banks are generally terrible at trading. But they are not happy about this, not one bit.

"A broad definition of prop trading (with narrow exemptions) that is aggressively enforced could be the worst outcome for the largest banks," Keefe Bruyette & Woods analysts wrote in a research note, according to Politico's Ben White.

Bankers warn that this version of the Volcker Rule means ginormous banks will not be able to protect themselves from future economic calamities, which means they have no choice but to get smaller and take fewer risks.

Which is exactly the point of the Volcker Rule, so: good news, then.

Treasury Secretary Jack Lew is expected on Thursday to deliver a speech basically declaring victory in post-crisis financial regulation. Hopefully he will have the sense not to speak in front of a giant "Mission Accomplished" banner, though, because the mission, she is not accomplished. Most of the Dodd-Frank rules are still not written. Banks are fighting bitterly against derivatives regulation. Too Big To Fail is still a problem.

But a tough Volcker Rule would be at least one major, actual accomplishment for regulators. And we have JPMorgan to thank for it. Maybe we should send them a fruitcake.