Wall St banks are learning that the U word is here to stay

"The quality or state of being uncertain; lack of certainty; doubt." That’s the definition of uncertainty you’ll find in Webster’s Dictionary, which Americans have relied on since Noah Webster published the first version just over 200 years ago.

It’s a word that US banks have been desperate to banish from the dictionary this year. Instead it’s become a fixture in any conversation about the future of Wall Street. It’s become so overused that you become immune to it.

You’ll hear more of it again today when JPMorganChase, America’s second-biggest bank and the only one to turn a profit throughout the crisis, reports its third-quarter results. Jamie Dimon, the bank’s chief executive, has been the most vocal critic of the wave of regulation that he and fellow Wall Street bosses believe is clouding their view.

The uncertainty that Dimon and his brethren complain about is, in part, political and philosophical. Before the crisis, Alan Greenspan, the former chairman of the Federal Reserve, believed bankers had refined the business of risk management to the point of near perfection. Politicians from both the Republican and Democratic parties were more than happy to enjoy the boom in house prices across America that went with it. That broad consensus over the role Wall Street should play in the wider US economy began unravelling as mortgage payments did in the summer of 2006.

The failure of the US recovery to build any momentum this year – 14m Americans remain unemployed and a further 9m are stuck with part-time work when they want full-time – will make the rebuilding of any consensus that much tougher. The cluster of concerns over inequality, for example, that the Occupy Wall Street protesters have pushed further into public view over the past month will echo for plenty of Americans who would not fancy joining them overnight in Manhattan’s Zuccotti Park.

But there’s another, much more practical, prosaic and less eye-catching, uncertainty that Wall Street banks are living with. This week provided a vivid reminder of it. On Tuesday the Federal Reserve published 298 pages of rules designed to implement a much bigger and more famous one named after Paul Volcker, the boss at the Fed before Greenspan.

As a brief recap, the Volcker Rule was part of last summer’s Dodd Frank financial reform legislation and bans US banks from making bets with their money and imposes tight limits on the amount of capital they can invest in hedge funds and private equity funds.

Supporters claim it will stop traders walking dangerous tightropes in the hunt for profits, knowing that the US taxpayer will be there to catch them should they fall. Opponents argue that regulators are aiming their bullets at the wrong target and that a ban on proprietary trading would not have prevented the reckless mortgage lending in the run-up to the crisis.

Wherever you stand on the merits of the Volcker Rule, it’s been a fertile ground in the political battle over Wall Street’s future. It’s also proved a nightmare for those charged with drafting the rules to implement it and enforce it. A former Fed official says that Volcker would infuriate staff at the central bank with his apparent neglect of how to turn policy into regulations that worked. In May, Volcker said that proprietary trading would be relatively straightforward for regulators to spot.

The almost 300 pages that the Fed posted on its website suggests that may not be the case. The document poses 383 questions that banks, consumer protection groups and other interested parties have until the middle of January to give their feedback on. The Volcker Rule then comes into effect in July, according to provisions of the Dodd-Frank Act, with banks being given a further two years to comply fully.

There’s little wonder that staff at the Fed and America’s other four chief financial regulators are understood to be anxious. They’re being asked to peer beneath the bonnet of a financial system that has become vastly more complex since the repeal in 1999 of the Glass-Steagall Act by President Bill Clinton – a move that allowed Wall Street banks back into the business of gambling with their own money.

In a letter to JPMorgan’s shareholders last year, Dimon helped illustrate the point when describing what the bank does. "We execute approximately 2m trades and buy and sell close to $2.5trillion (£1.6trillion) of cash and securities each day," investors were told. Distinguishing proprietary trading from say, market making in a particular set of securities or buying assets as a hedge against risks taken elsewhere inside a bank the size of JPMorgan, will not be straightforward.

It’s not clear how difficult in practical and regulatory terms the repeal of Glass-Stegall was. More obvious is that the modern set of officials at the Fed, the Securities and Exchange Commission and the Federal Deposit Insurance Corporation will be pushed to their very limit regulating today’s financial system. Banks are understandably restive and irritated, especially as the economic climate has become tougher for business anyway. But there’s no quick fix.

Larry Summers and Greenspan had a much easier job rolling back financial regulation than Bernanke & Co do rebuilding one that works. The uncertainty that Dimon complains of isn’t going away quickly. If anything, Noah Webster’s successors should put its entry in capital letters.