Bruno Iskil, the infamous “London Whale,” will leave JPMorgan Chase in the wake of his soured “Fail Whale” trades which lost the bank $2 billion to date. “The timing of the departure is unclear,” according to sources, probably because the trade hasn’t yet been unwound.

Whenever Iskil departs, it won’t end the fact that JPMorgan Chase, as evidenced by the Fail Whale debacle, is running a hedge fund inside their bank, as Sen. Jeff Merkley said in our interview yesterday. We can have these elegant debates about whether the trades represented a bet or a hedge, but if those trades weren’t gambling, then the word “hedge” has lost all meaning. Whether Jamie Dimon got his lobbyists to gut the Volcker rule and make his betting legal is also immaterial.

Why don’t we want hedge funds inside big banks? For a variety of reasons. You give the hedge fund an unfair advantage of a taxpayer subsidy, from depository insurance and access to the Federal Reserves low interest discount window and other benefits of commercial banks. A bank, with all its other functions and hundreds of thousands of employees and trades being made all over the world, cannot possibly stay on top of the markets the way a hedge fund can (it’s a “too big to manage” problem along with “too big to fail”). And if and when the hedge fund melts down from all that risk, you create an intolerably dangerous situation for the bank, leading to potential bailouts with taxpayer dollars.

There’s just no rational reason to allow hedge funds to exist inside of banks. As Paul Volcker said today, “if (banks) want to do proprietary trading, they want to do a lot of other things, it’s very simple: give up their banking license.” At least wall off the risk somewhat. It’s not a perfect solution, but it’s far better than where we’re at now.

That’s especially true because banks like JPMorgan Chase are out soliciting investor money to use in speculation, amping up their risk and raising the probability of an eventual meltdown and bailout. By and large these are separate from the depositor money, but it gives the bank the best of both worlds: they can reap the benefits of being a depository institution, with the insurance and cheap loans that provides, while adding the risk and potential reward of being a hedge fund. To quote Amar Bhide:

What scares me is not the $2 billion that JPMorgan lost. It’s the record $19 billion profits that JP Morgan made. How on earth do they make a $19 billion profit quote unquote “putting customers first” in an economy that’s supposedly slowing down and their customers are flat on their backs?

The answer is by taking enormous risks that can backfire, as we’ve seen with these trades.

Shareholders have begun their counter-attack. They claim that JPMorgan Chase misled them by misrepresenting the risk from these trades, which eventually led to a drop in the share price. And they have filed three shareholder lawsuits on those terms. Assuming most banks on Wall Street engage in this – and thus have the same exposure – it won’t be long before a debacle like this leads to a systemic risk and a big bank failure. That’s why we have to stop these practices before it’s too late.