Simon Johnson: Why Dimon must leave NY Fed board
Critics say JPMorgan Chase CEO Jamie Dimon's position on the board of the Federal Reserve Bank of New York, which supervises big depository banks, represents a conflict of interest and want him removed from the panel.
(MoneyWatch) JPMorgan Chase (JPM) CEO Jamie Dimon sits on the board of directors of the Federal Reserve Bank of New York, which as one of the main institutions charged with supervising the financial giant is now looking into how the company recently came to lose an estimated $3 billion in securities trades.
Dimon's presence on the board is dead wrong, says Simon Johnson, a professor of economics at the MIT Sloan School of Management and a noted Wall Street critic who is leading a petition drive to remove the chief executive from the New York Fed board. The initiative, announced today on the website of Change.org, a platform for user-generated campaigns, calls for Dimon to resign from the panel or be forced out.
The New York Fed is one of 12 regional Reserve Banks that, along with the Board of Governors in Washington, D.C., compose the Federal Reserve system. Created in 1914 to increase the safety of the U.S. banking system following a string of financial crises, the New York Fed regulates big depository institutions like JPMorgan Chase, among other duties. And historically, the New York Fed has exerted outsized influence on regulatory, monetary, and other financial policy because of its location in New York, home to Wall Street.
Johnson, the former chief economist for the International Monetary Fund and author of "13 Bankers: The Wall Street Takeover and the Next Financial Meltdown," says Dimon's participation in the New York Fed represents a clear conflict of interest. Johnson isn't alone in that assessment. U.S. Treasury Secretary Tim Geithner, who before being tapped to join President Obama's cabinet was president of the New York Fed, said last week in a television interview that Dimon's presence on the bank's board, and that of other bankers, creates a "perception" that lenders may skew the regulator's oversight of banks.
Johnson is stronger in his condemnation of Dimon's role at the New York Fed. He says the historical convention seating financial executives on the bank's board is outdated and inappropriate given the power of the financial industry. Johnson spoke with CBS MoneyWatch about his public push to eject the banking executive from the New York Fed.
CBS MoneyWatch: Why did you start this campaign?
Simon Johnson: The continued presence of Mr. Dimon on the New York Fed board is undermining the legitimacy of the Federal Reserve, and that's a big problem. I am echoing what Treasury Secretary Tim Geithner said recently to the PBS NewsHour -- he said there's a perception problem and that the rule [permitting bankers to sit on the New York Fed] should be reversed, which I took to mean that Dimon should leave the board.
But it's more than a perception problem. Dimon interacts a lot with the members of the New York Fed. Although as a banking executive he is kept away from supervision at the bank, obviously something like high-profile trading losses is more than just a supervisory matter. He also oversees the activities of the research department at the New York Fed, and that department is very much involved in determining what are the appropriate capital requirements in various parts of the financial sector and what constitutes sensible modeling of risk. The latter is absolutely critical to what appears to have happened at this JPMorgan unit [involved in the bank's recent trading losses].
To the best of my knowledge, no other central bank in any serious country in the world allows bankers to be represented in this fashion. In fact, I can think of a lot of non-serious countries where you wouldn't even consider allowing bankers to sit this close to the central bank.
Your petition characterizes Dimon's position on the New York Fed board as the "fox guarding the henhouse." Elaborate on what that means.
The New York Fed is a critical part of the supervisory and regulatory process for Wall Street at the Federal Reserve. We're worrying a lot these days about how "too big to fail" banks behave and the damage they have done to the economy, so it's very strange to have someone like Jamie Dimon on the New York Fed's board.
I'm not opposed to having substantial financial experience on the board. The National Transportation Safety Board provides a model where you have people at the end of their careers offering their expertise as boardmembers. But this is a 100-year governance mechanism at the New York Fed, and it's time it was changed.
As a matter of principle, are you against allowing any banking executive to sit on a Federal Reserve Bank's board?
That's where I think the discussion should go next. Yes, I do think we should change that arrangement. There are various ways to do that, and we should have that debate. Realistically, that's not going to happen anytime soon. That's a legislative matter, and we're in the middle of a presidential election.
However, Mr. Dimon can certainly resign or be pushed out. There is ample precedent for that. Although we don't know this for sure, there's agreement among informed people that [former Lehman Brothers CEO] Dick Fuld was encouraged to leave the New York Fed Board during the financial crisis. Stephen Friedman, who was a Goldman Sachs (GS) executive and turned out to be trading Goldman Stock while he was chairman of the New York Fed board, also had to resign in 2009.
Regarding JPMorgan, I'm not saying that any laws have been broken or that it's a criminal matter by any means. I'm simply echoing Tim Geithner, who's not known to be an opponent of the banks. If Tim Geithner thinks this is a problem, it's a problem. This tells you that this has gotten out of hand. It would be much better for the Federal Reserve system if Mr. Dimon were to step down.
Do you expect your campaign to have any effect in swaying New York Fed President Bill Dudley or other members of the Federal Reserve?
Realistically, they will ignore me. But that's not the point -- the point is to bring public attention to this issue. And to be honest, I would say I think this is going very badly. Take the petition campaign against "pink slime." It's gotten something like 250,000 signatures and has [been effective] in changing policy on this rather revolting stuff. So far, my campaign has gotten maybe 2,000 signatures.
Pink slime is an enormous problem, don't get me wrong. But given the enormity of the risks posed by the financial sector and the serious damage that it has done -- and I think will do -- to the world economy, the fact that we can only get a couple thousand people interested in this tells you just how difficult it's going to be. It's a complex issue. People don't understand it. They don't see it in their lives as much as they see pink slime, and they just let it slide. That's why the bankers get away with it.
Is this petition going to dramatically change policymakers' opinions? No, the banks will no doubt win this round, too. But that just tells you where we are and where we're going.
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