In December 2010, MF Global sent a letter to regulators to say that they did not need tighter restrictions on how they handled client funds. In October 2011, just 10 months later, $1.6 billion was missing from MF Global client accounts and the firm was bankrupt.
Before disclosing a $2 billion (for now) trading loss, JPMorgan lobbied against financial industry regulations. CEO Jaime Dimon told shareholders that “we now have multiple regulatory agencies with overlapping rules and oversight responsibilities. We now have allowed regulation to become politicized, which we believe will likely lead to some bad outcomes”. The firm has 12 lobbyists, and spent $7.6 million on lobbying last year (according to the Center for Responsive Politics).
But that is to be expected. Industries lobby. Especially the financial industry. Last year, commercial banks employed 456 lobbyists, and spent a combined $61.8 million (the airline industry had 198 lobbyists, and the steel industry had 107).
Lobbying for the interests of your industry is one thing. Sitting on the board of the regulator that oversees your industry is quite another thing.
That’s exactly what Jaime Dimon is doing. On one hand, he heads a firm that just reported a $2 billion trading loss, and on the other hand, he serves on the Board of Directors for the Federal Reserve Bank of New York, which oversees banking activity. If that is not a blatant conflict of interest, it certainly smacks like one.
To be fair, Jaime Dimon didn’t appoint himself to the board. He was elected…by banks…to represent banks. Dimon is just filling the role, as it’s defined by the Fed:
“The Bank’s Board of Directors has nine members, all chosen from outside the Reserve Bank…directors are elected by the member commercial banks…directors are required to be representative of the member banks in the District and for the most part they have been officers or directors of member banks or their holding companies.”
And Dimon was quick to minimize his influence on the Fed, saying that it is “not like a board, it’s more like an advisory group”. But that’s not exactly how the Fed phrases it:
“The roles of Reserve Bank directors generally fall in three principal areas: overseeing the management of the Reserve Banks, participating in the formulation of national monetary and credit policies, and acting as a “link” between the government and the private sector.”
Even though Dimon is just doing his job, it certainly doesn’t sit well to have the ‘fox guarding (or advising) the hen house’ when the fox just lost $2 billion in a hedging strategy gone sour and the hen house has tax dollars.
And it clearly doesn’t sit well with Treasury Secretary Tim Geithner. When asked whether Dimon should resign from the Fed’s board, he stepped around it delicately and said “that’s a question he’ll have to make and the Fed will have to make”. He said that there is a “perception” problem. He didn’t say no. And in Treasury-speak that was a clear message to Dimon: it’s time to go.
Geithner just might have a good reason for calling on Dimon to leave. He was once the President of the New York Fed. He knows how things operate.
And Geithner is not the only one who would like to see Dimon go…he was only the most diplomatic in his language. Elizabeth Warren didn’t mince words when she said that “Dimon should resign from his post at the New York Fed to send a signal to the American people”. And MIT professor and former IMF economist Simon Johnson said that his involvement with the Fed is “no longer acceptable”.
But this sort of thing is nothing new. Last year, the Government Accountability Office found that 18 former and current members of the Fed’s board were affiliated with banks (or companies) that got emergency loans during the financial crisis.
At bare minimum, Dimon’s post on the board poses a ‘reputational risk’ to the New York Fed. And regardless of whether it is a real conflict of interest, or simply a ‘perceived one’, it muddies the Fed’s independence, and it stands to undermine its effectiveness. But don’t blame Dimon, or the Fed. Blame Congress.