(Bloomberg News) U.S. lawmakers and interest groups favoring tighter restrictions on proprietary trading said JPMorgan Chase & Co.'s $2 billion loss on synthetic credit securities bolsters their case.

Senator Carl Levin, chairman of the Permanent Subcommittee on Investigations and co-author of the so-called Volcker rule, said the New York-based bank's disclosure is a "stark reminder" to regulators drafting the proprietary-trading ban required by the Dodd-Frank Act.

"The enormous loss JPMorgan announced today is just the latest evidence that what banks call 'hedges' are often risky bets that so-called 'too-big-to-fail' banks have no business making," Levin, a Michigan Democrat, said in a statement released yesterday.

The Federal Reserve, Securities and Exchange Commission and Federal Deposit Insurance Corp. are among regulators drafting the Volcker rule to limit bets banks can make with their own funds. JPMorgan, with other Wall Street banks including Goldman Sachs Group Inc. and Morgan Stanley, have lobbied regulators to expand exemptions included in a draft proposal released last year.

"Their ability to shape the discussion in Washington, D.C., on the Volcker rule might have gotten materially set back," David Hendler, an analyst at CreditSights Inc., said in an interview.

Tighter Restrictions

Levin and Senator Jeff Merkley, the Oregon Democrat who co- wrote the provision, have used meetings and a comment letter to press regulators to tighten restrictions in the final rule, first proposed by former Fed Chairman Paul Volcker.

Asked about the JPMorgan disclosure, Julie Edwards, Merkley's spokeswoman, said the loss "speaks for itself."

Representative Barney Frank, the Massachusetts Democrat who co-wrote the regulatory law that bears his name, said the loss "obviously goes counter to the bank's narrative blaming excessive regulation for the woes of financial institutions."

The Volcker rule is intended to keep banks from putting federally insured deposits at risk. Wall Street firms have said the proposed rule is so broad and ill-defined that it will force them to shed businesses and increase risks for clients.

"They've now just provided some ammunition, one would suspect, to the legislative and regulatory personnel who will just point at this and say, 'It seems to me that these people don't really have a good handle on what they're doing,'" Satyajit Das, author of "Extreme Money: Masters of the Universe and the Cult of Risk," said in a phone interview from Sydney.

Self-Inflicted Losses

JPMorgan Chief Executive Officer Jamie Dimon said that while the losses were "self-inflicted," they may not have run afoul of the Volcker rule and don't weaken arguments against the proposal.

"This does not change analyses, facts, detailed argument," Dimon said yesterday on a conference call with analysts. "It is very unfortunate. It plays right into all the hands of a bunch of pundits out there."

Volcker, who testified at a Senate Banking Committee hearing on May 9, told reporters there was "no question" that lobbying from banks contributed to the complexity of the initial proposal.

"I could give you stories all day about lobbyists making things more complicated," the former Fed chairman said.

The Volcker rule allows banks to continue activities that are considered hedging, as well as to serve as market-makers, accepting risk or holding shares of trades to facilitate client orders.

Hedging Exemption

Dimon said on the conference call that the original premise of the trades by the chief investment office was for the firm's hedging. Synthetic credit products are derivatives that generate gains and losses tied to credit performance without the owner buying or selling actual debt.

Levin and Merkley, in their February comment letter, pushed regulators to tighten the exemption for hedging, calling some of what may be allowed a "major weakness" in the rule.

"The argument that financial institutions do not need the new rules to help them avoid the irresponsible actions that led to the crisis of 2008 is at least $2 billion harder to make today," Frank, the top Democrat on the House Financial Services Committee, said today.