By Simon Johnson
Jamie Dimon, CEO of JP Morgan Chase, is a member of the board of the New York Federal Reserve Bank. Mr. Dimon’s role there is sometimes presented as “advisory” but he sits on the Management and Budget Committee; here is the committee’s charter, which includes reviewing and endorsing “the framework for compensation of the Bank’s senior executives (Senior Vice President and above)”. His advice apparently extends to important aspects of how the New York Fed operates, including its personnel policies.
The New York Fed is a key part of our regulatory and supervisory apparatus, involved in overseeing the activities of banks and bank holding companies, like JP Morgan Chase (currently the largest bank in the US). Within the Federal Reserve System, the New York Fed also has some of the deepest expertise on financial markets and complex products, such as derivatives. Almost all of the relevant supervision takes place behind closed doors, with representatives of the industry – including big banks – typically taking the position that they should be allowed to operate in a particular way or use various kinds of risk models. The staff of the New York Fed often has a decisive voice in determining what kinds of risks are acceptable for systemically important financial institutions.
In recent weeks, risk management apparently broke down completely at JP Morgan Chase. Even the most sympathetic accounts portray Mr. Dimon as out of touch with large parts of his business. There are also press reports that one or more of Mr. Dimon’s hand-picked executives failed to understand and report on risks that became greatly magnified and quickly got out of control. Puzzles remain about what exactly Mr. Dimon did not know and when he did not know it, including the question of whether he disclosed all adverse material information in a timely and appropriate manner. Presumably, the New York Fed will be involved – directly or indirectly – in ongoing and future investigations (including answering questions about what its staff did or did not know).
At the end of last week, Treasury Secretary Tim Geithner called for Mr. Dimon to step down from the board of the New York Fed. Mr. Geithner is former president of the New York Fed and fully understands how the board operates – and how big bankers win friends and influence people. Mr. Geithner spoke in the usual Treasury Department diplomatic code – he suggested there is a “perception” problem that must be addressed. To officials, this is as clear a statement as is needed. As chairman of the Financial Stability Oversight Council, Mr. Geithner is ultimately responsible for the health of the financial system and its systemically important components. He is telling Mr. Dimon to go.
Mr. Dimon is likely to resist, but the blatant conflicts of interest in the current situation are too great. Mr. Dimon should not be in any position to influence or affect an organization that plays such an essential role in overseeing the activities of his company. Given the evident breakdowns in risk management at JP Morgan Chase and the possibility that there were again problems with bank supervision in this instance, we need to have a proper independent investigation – and to changes the parameters of this banker-supervisor relationship going forward.
To have Mr. Dimon involved in overseeing the management of the New York Fed, an organization that oversees his activities, decisions, and potential losses, is no longer acceptable. We do not accept such conflicts of interest in other parts of American society and we should not accept them in this instance.