JPMorgan's James Dimon: Should he resign from the New York Fed?
In the wake of the $2 billion-plus trading loss at JPMorgan Chase, revealed earlier this month, a debate has been heating up about whether JPMorgan’s chief, James Dimon, should step down from the New York Federal Reserve’s Board of Governors. Today, one of Dimon’s critics, former International Monetary Fund chief Simon Johnson, started a petition on Change.org, calling for Dimon’s ouster from the Fed.
Since it’s the New York Fed’s job to regulate JPMorgan and other New York banks, says Johnson, who is now a professor at M.I.T., the public will have a tough time trusting that the Fed can do that properly if Dimon continues to serve on the Fed board. Earlier this month, shortly after JPMorgan announced the losses, Simon said he thought Dimon should resign his CEO post at the bank.
Johnson isn’t alone in calling for Dimon’s Fed ouster. In mid-May, Elizabeth Warren, a Democratic Senate candidate in Massachusetts who helped establish the Consumer Financial Protection Bureau, said she thought Dimon should step down from the Fed. Wrote Warren in a statement, Dimon should resign in order “to send a signal to the American people that Wall Street bankers get it and to show that they understand the need for responsibility and accountability.”
Treasury Secretary Tim Geithner, in more circumspect language, agreed. In answer to a question about whether Dimon should vacate the Fed board, Geithner replied on the PBS Newshour, “it is very important. . . . that our system of oversight and safeguards and the enforcement authorities . . . . are perceived to be above any political influence and have the independence and the ability to make sure these reforms are tough and effective.” That’s careful, diplomatic Treasury-speak for yes, I think Dimon should resign his Fed post.
Yesterday two liberal senators, Bernie Sanders (I-Vt.) and Barbara Boxer (D-Calif.) introduced legislation that would remove all bankers, including Dimon, from the Fed’s board. About the current Fed structure, Sanders said at a press conference, “If that is not a clear example of the fox guarding the hen house, I don’t know what is.” The bill is unlikely to go anywhere, but it’s a sign of growing unease on Capitol Hill about the central bank’s role. Republicans don’t like the Fed’s close ties to the White House.
A thoughtful article in American Banker today points out that in fact, Fed board members who work at banks don’t get involved in the Fed’s regulatory work. The Fed has an unusual, complicated structure, established by Congress in 1913 and refined in 1977. Only three bankers, from a large, medium and small bank, sit on the nine-member regional Fed boards, which serve the Fed’s 12 regional banks. The banker members are there to offer information, rather than to make policy, point out Dimon’s defenders. In 2010, the Dodd-Frank law underlined the fact that Fed directors should be kept away from supervisory duties.
“Just because it’s a perceived conflict of interest doesn’t mean it’s a real one,” Karen Shaw Petrou, a managing partner at Federal Financial Analytics, a consulting firm, told American Banker.
Ernest Patrikis, a partner with the White & Case law firm and former general counsel of the New York Federal Reserve, insisted that Dimon has no conflict at the Fed. "What's the conflict? He's expected to represent the banks' view, the lenders' view," Patrikis told American Banker.
Former IMF economist Johnson also published a piece on the New York Times Economix blog today, spelling out the tensions at the Fed. While he acknowledges the nuances of the director job, nodding to Patrikis’ point that Dimon’s function is to represent banks’ point of view, rather than to regulate, Simon spells out how muddy things can get. For instance, Fed directors have input into the selection and compensation of the Fed’s head of research, who helps shape the Fed’s view on technical but important issues like risk management, he writes.
As much as Congress has tried to clarify the distinction between regulatory and advisory functions at the Fed, Johnson makes a convincing case that the lines remain blurred. “There is an undeniable perception problem,” he writes. “It is damaging the legitimacy of the Federal Reserve.”
