Whispers: Capitol Hill conservatives piqued by timing of Gellasch's quick SEC exit, Levin's rehiring after SEC leak report leaked

Capitol Hill conservatives are whispering about the timing of a progressive lawyer???s departure from the Securities and Exchange Commission and his sudden return to the staff of the Senate Permanent Subcommittee on Investigations, chaired by Sen. Carl M. Levin (D.-Mich.).

The lawyer, Tyler Gellasch, a long-time aide to the Michigan senator, had been working as the staff attorney for Kara M. Stein, a Securities and Exchange Commissioner.

The speculation is that Gellasch was the source of leak from a closed-door meeting of the Securities and Exchange Commission. If he was the leak, it calls into question the integrity of a critical staff member on a critical committee and the SEC???s own processes and reputation as a fair broker.

It also betrays a brazen hypocrisy.

Gellasch is one of the leading insider trading alarmists, as well as the principal author of the Stop Trading on Congressional Knowledge Act???get it? S-T-O-C-K? The act was partially-repealed at the behest of the President Barack Obama to relieve senior Capitol Hill staffers of its burdens.

If Gellasch proves to be the leaker, it will mean that although closely-held information stolen or misused is criminal activity, it is a criminal activity that he himself regards as just another took in his kit.

While Gellash was working for the Senate’s Michigan mandarin, he championed the federal government???s takeover of high-risk trading on Wall Street, specifically trading conducted at proprietary trading desks.

Unlike trades executed upon the instructions of clients, traders on the proprietary desk, working for a bank or other institution, trade on behalf of their employer???s own account. These traders typically have tremendous freedom to buy and sell inside, a freedom that increases as they develop a track record.

The lawyer even ghosted a policy essay for Levin and Sen. Jeffrey A. Merkley (D.-Ore.) with Merkley???s own champion for federal control of private transactions, Andrew Green. The article on the evils of proprietary trading was published in the Harvard Journal of Legislation.

Gellasch???s return to Levin???s fold coincides with the release of a closely-held report by the SEC???s Inspector General, which chronicled its futile search for a source inside the commission staff, who was leaking information about the commission???s vote to fine JPMorgan, Chase & Co., $920 million fine for its handling of the 2012 ???London Whale??? scandal to Reuters reporter Sarah N. Lynch.

London Whale was the nickname for JPMorgan, Chase trader Bruno Iskil, who was largely responsible for his bank’s taking a $6.2 billion loss. The loss became a rallying point for liberals looking to bring private transactions under federal control. The term ???whale??? is also Wall Street slang for a large position that is too costly to unwind and record on the books as a loss, thus the beached whale waits for the market tides to return and carry the whale back to liquidity.

In the case of the London Whale loss, the head of JPMorgan???s investments, Ina R. Drew, ordered the London desk to reduce the risk on the balance sheet of its Synthetic Credit Portfolio in December 2011, according to the bank???s 129-page review dated January 16, 2013.

When London traders told Drew it would be costly to unwind certain illiquid positions, Drew allowed the traders to execute high-risk, short-term trades to offset the illiquid positions. This hedging should have negatively correlated the portfolio to zero, as trades going in opposite directions would offset each other.

In time, the hedge may have worked, but because it also greatly expanded the size of the portfolio, which itself exposed the bank to greater risk. In March and April 2012, the bank went ahead and unwound the illiquid positions and its subsequent hedges for a $6.2 billion loss.

This loss was against the bank???s $100 billion in 2012 revenues and took the bank???s profits down to a mere $21 billion.

Granted a 25 percent hit to profits is significant, but in reality, it is the cost of doing business on Wall Street???or in this case, London with command and control from Wall Street.

In addition to becoming Exhibit A in the liberal campaign to put private transactions under the control of the federal government. The loss was brought before the SEC because it reflected poor internal controls in the bank???s trading department.

The Sept. 12 SEC vote was 2-1 with Stein and  Commissioner Luis A. Aguilar voting for the fine and Commissioner Michael S. Piwowar opposed. There were two recusals, Chairwoman Mary Jo White and Daniel M. Gallagher . The meeting was a confidential executive session and the vote was reported to the press simply as being split.

Of course, the SEC IG???s report was itself leaked to the press, in this case to CNBC, which has put out some details July 29.

According to CNBC reporter Eamon Javers??? July 31 report, the investigators searched government-issued Blackberries, email accounts and other records to determine the source before giving up with its March 5 report.

The Office of the Inspector General got involved after Lynch called Piwowar Sept. 17 and spoke to him in detail about his objections made in the secret meeting that the commission was fining a company, not punishing the actual individuals responsible.

During the investigation that including interviews with commissioners and more than 50 SEC staffers, the IG determined that there was contact with Reuters around the time of the leak.

Javers quotes the report: “However, the OIG determined that a Commissioner and two SEC staff members had spoken to Lynch and one SEC staff member had spoken to Reuters reporter Emily Flitter around the time that the information was improperly disclosed. The OIG also found that one of those employees may have confirmed certain information.”

Upon CNBC breaking the story of the IG investigation, Lynch (!) reported Gellasch was leaving SEC staff to rejoin Levin???s team.

Maybe, it is just one of happy Washington coincidences.

Maybe, not.

[The original posting of the article listed Daniel M. Gallagher as a voting against the JPMorgan  fine, he recused himself. Luis A. Aguilar was listeas as a recusal, he voted for the fine. The text has been corrected to reflect this reversal.]

[The original posting of the article listed Daniel M. Gallagher as a voting against the JPMorgan fine, he recused himself. Luis A. Aguilar was listed as a recusal, he voted for the fine. The text has been corrected to reflect this correction.]