In addition to asking Jeff Merkley about filibuster reform, I sought his reaction to the Fail Whale trades that have racked up massive losses at JPMorgan Chase. Merkley, along with Carl Levin, authored the Volcker rule, the ban on most types of proprietary trading, that made its way into the Dodd-Frank financial reform bill. There has been a lot of slippage on the rules, however, once they left Congress and made their way through the regulatory gauntlet.

“Sen. Levin and I were very specific on risk management, that it had to apply to a specific identified risk,” Merkley said in an interview. “You can have hedges, but on a position-by-position basis. The risk was not identified for any of the multitudinous moves in the London Whale’s strategy. Even Jamie Dimon agrees with that. But he said it’s part of some vast portfolio hedge. The concept of a specific risk and a specific hedge does not fit with a portfolio hedge.”

Merkley chalked it up to two years of lobbying by Wall Street, including from Dimon and JPMorgan Chase, chipping away at the rule he authored, whittling it down to practical irrelevance. “If portfolio hedging stays in the rules, it guts the Volcker rule,” he said.

He then listed all the reasons you would want to put up a firewall between bank deposits and what amount to hedge fund trades. “If you allow hedge funds to operate inside of banks, you subsidize them with taxpayer money through the discount window and other lending facilities. You subvert the funds that should be used for lending to small businesses into this trading activity. And if the risky trades go bad, they melt down the system of credit in this country. The business community should be 100% behind the Volcker rule firewall because it sustains a reliable supply of credit.”

Indeed, one of the reasons that JPMorgan Chase had the ability to make these massive trades was because of a windfall of taxpayer-insured excess deposits. They took the money and, instead of using it to stimulate more lending or economic activity, decided to gamble with it, secure in the knowledge that, even if they lost, they would make it up or get the government to give them a fresh set of chips. This is no different from the kinds of risky practices we have seen in the financial sector since before the financial crisis.

The critique falls in line with the calls by many financial reform advocates and pundits to “make banking boring,” so that everyone stays in their lane, with the banks providing credit and the allocation of capital, and hedge funds doing the high-risk trading outside of the commercial bank framework. “I have no objection to Jamie Dimon being the head of a hedge fund,” Merkley said. “I object to having him run a hedge fund inside a large bank.”

This has led to some calls for rules stronger than what we see in even a restored Dodd-Frank. Merkley doesn’t see much hope for passage there. “I seriously doubt that any bill will get to the President’s desk that fundamentally moves in that direction,” he said. As for what it would take to get the debate going that way? “It will take another crisis to move the debate. We’ll hopefully avert much of the crisis with the rules we have in place now.” Merkley reasoned that the Volcker rule’s firewall would limit systemic risk by farming it out to hedge funds and less systemically important institutions. “You can start a fire on your patio, so nothing in the house is injured,” Merkley said by way of analogy. “If you set your living room on fire, you burn down your house.”

But this all assumes that the Volcker rule, and the other parts of the as-yet not fully implemented financial reform (including derivatives rules, which Brooksley Born called attention to today), get implemented properly. That’s not what we’re seeing right now. So Merkley and others will have to use this event as a pressuring mechanism to get the federal regulatory apparatus back on track with the language and the spirit of the law. Even then, nobody would suggest that the post-Dodd-Frank landscape is perfectly safe compared to the landscape before the legislation.

“There is still systemic risk,” Merkley said.