A few quick thoughts and suggested readings on Chase's ever expanding losses from the Whale Trade.
First, if you have not been reading Lisa Pollack's Alphaville posts on this topic you really must.
Next, Krugman makes the obvious but also vital point that "invisible hand" type arguments are really pointless in the specific context of financial institutions, especially giant financial institutions. It's a point I've made before with regard to resolution, and a reason why things like the fabulous Hoover people's Chapter 14 plan is totally unmoored from reality, but it also applies equally well to pre-distress regulation.
That said, let me push back on that post a bit. The author suggests that the Chase trade might not have been permissible under the VR -- despite the hedging exception -- because to get that exception you also have to have a trade that satisfies several other criteria. In hindsight it is arguable that Chase did not meet several of these requirements. But that's in hindsight. How easy would it have been for Chase to argue that these boxes had been ticked if a regulator questioned them ex ante?