Anyone who saw 'Inside Job' would know that the 2008 global financial crisis (GFC) revealed fundamental deficiencies in the financial sector. With the lacklustre recovery in the US and Europe still deeply mired in the aftermath of 2008, you might think the climate would favour far-reaching reforms. But change is pushing up against the strong resistance of Wall St. 

Has the reform effort been boosted by the recent travails of JPMorgan Chase?

Its CEO, Jamie Dimon, had led Wall St's push-back against regulatory reform, describing the new Basel III Accord (the attempt to get some international consistency into bank regulation) as 'un-American'. His credentials carry some weight because his firm, renowned for its mastery of risk, had prospered as its rivals were brought low in 2008. In a characteristically pugnacious way, he put Fed Chairman Bernanke on the spot about the unproven efficacy of the reform process.

How the mighty have fallen! JPMorgan Chase has had to announce that one of its traders ('the London Whale') had clocked up trading debts initially estimated at $2 billion but commonly thought to be twice this by the time the mess is cleared up. Dimon initially dismissed this as 'a storm in a teacup', but he subsequently acknowledged 'terrible, stupid and egregious' errors (Bernanke would be super-human if he has been able to resist a moment of schadenfreude).

Where this current episode should have most impact is on the vexed issue of 'too big to fail'. The losses of JPMorgan Chase, while not threatening the solvency of the firm, illustrate that the more fundamental problem is 'too big to manage'.

Given the embarrassment to Dimon (who is being very publicly urged to resign from his prestigious position on the Board of the New York Fed), this event does seem to represent not so much a lapse of risk management but rather a demonstration that the job is too complex to be done adequately.

If this is true, then these sorts of institutions are also too big for regulators to understand, and certainly too big for any realistic degree of market discipline via transparency.

Yet we are unlikely to see this issue addressed effectively. The financial sector has not been able to stop the efforts at regulation, but it has managed to make them so convoluted that they may well be unworkable. The US has already passed the Dodd-Frank Act. Congress managed to squeeze the broad principles of regulation into 2300 pages of legislation. By the time the implementing regulations are written, it will have deserved its informal title of Financial Lawyers' Full Employment Act.

And this is only the start. The Volcker Rule (attempting to prevent banks trading in financial markets on their own account) takes up nearly 300 pages of Dodd-Frank, and won't come into force for another two years. In response to Wall St pleading, US bond trading has been exempted. This immediately led to protests from Canada and Japan: if US bonds were exempt, then so should their own government bonds.

Volcker himself, faced by this concerted obfuscation, would be happy to wind back the clock to pre-1999, going back to the Glass-Steagall solution of separating stolid conventional banking from the go-go business of investment banks, with its fundamentally different risk characteristics (and thus need for different style of management). This worked for over sixty years and was only 37 pages long (including appendices). But it's not possible to go backwards; only forwards into the morass of greater complexity.

Photo by Flickr user Chris Blakely.