JPMorgan CEO Jamie Dimon
May 15 (Bloomberg) -- The $2 billion trading loss at JPMorgan Chase & Co. has revived concern that its regulator, the Federal Reserve Bank of New York, is too cozy with Wall Street.
JPMorgan Chief Executive Officer Jamie Dimon is one of three bankers sitting on the board of the New York Fed, as required by law. While directors play no part in bank supervision, Elizabeth Warren, a Democrat running for U.S. Senate from Massachusetts, called for Dimon’s removal from the district bank board. Senator Bernard Sanders, a Vermont Independent, said he sees a conflict in Dimon’s two roles.
Fed governance came under scrutiny after taxpayer-funded bailouts during the 2008 financial crisis sparked a political backlash. The Dodd-Frank Act overhauling bank supervision required a Government Accountability Office audit of the central bank, which was completed last year and found the Fed needs to strengthen policies governing conflicts of interest and improve transparency.
Having bankers on the boards of regional Fed banks “is a problem, period,” said Sheila Bair, senior adviser at Pew Charitable Trusts and a former chairman of the Federal Deposit Insurance Corp. “Why the regional banks have members of the industry that they regulate on their boards is beyond me.”
Jack Gutt, a spokesman for the New York Fed, declined to comment on Dimon’s role on the board.
The New York Fed is one of 12 regional Fed banks and supervises some of the nation’s largest financial firms, including Goldman Sachs Group Inc. and Citigroup Inc.
Organizational Issues
Fed spokeswoman Barbara Hagenbaugh said the central bank, as JPMorgan’s holding-company supervisor, is studying organizational issues around the trading loss to assure that they aren’t repeated in other areas of the bank. The loss underscores the importance of capital buffers, she said.
The Office of Comptroller of the Currency said yesterday that it is examining JPMorgan’s activities and evaluating its transactions following the $2 billion loss that shook up bank leadership.
The regulator, which oversees national banks including JPMorgan Chase Bank N.A., also is evaluating risk management strategies and practices at other large banks to validate their understanding of risk levels and controls. The OCC said JPMorgan’s losses affect its earnings while not presenting a threat to the safety and soundness of the bank.
JPMorgan shares rose 2.8 percent to $36.78 at 2:41 p.m. in New York trading today, after falling 3.2 percent yesterday and 9.3 percent on May 11, the most in nine months. The KBW Bank Index of 24 financial stocks was down 0.1 percent to 45.15.
In passing the Federal Reserve Act of 1913, Congress sought to balance influence over the institution between the government and commercial banks. Lawmakers created nine-member boards for each of the reserve banks and assigned three of those seats to bankers. The remaining six represent the borrowing public.
The directors choose the president of their bank, with the approval of the Washington-based Board of Governors, as well as senior officials. They also give advice on regional economic conditions.
Dimon told shareholders today in Tampa, Florida, that the New York Fed’s board of directors is “not like a board, it’s more of an advisory group.”
“I am not involved at all in the supervisory side of that,” he said.
The 2010 Dodd-Frank Act ended the practice of banker directors having a vote in electing regional presidents, a move the New York Fed’s William C. Dudley said in a September interview that he supported.
‘Obvious Conflict’
“It is an obvious conflict of interest for Jamie Dimon, the CEO of the largest bank in America, to serve on the New York Fed’s board of directors,” Sanders said yesterday in an e- mailed statement. “This is a clear example of the fox guarding the henhouse.”
Sanders, who wrote the legislation requiring the audit in the Dodd-Frank Act, said he is working on a law that would prevent anyone who “works for a firm receiving direct financial assistance” from the central bank from sitting on Fed boards.
Warren, a Democrat, has served in the Office of the President and as chairwoman of the Congressional Oversight Panel for the Troubled Asset Relief Program. She helped establish the Consumer Financial Protection Bureau.
Americans ‘Frustrated’
“After the biggest financial crisis in generations, the American people are frustrated that Wall Street has still not been held accountable and does not appear to consider itself responsible,” she said. “Dimon should resign from his post at the New York Fed 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.”
Senator Bob Corker, a Tennessee Republican and a member of the Senate Banking Committee, said in an interview with Bloomberg Television that it is “way, way, way, way, way early to be jumping” to the conclusion that Dimon should resign from the New York Fed’s board.
Dimon announced his bank’s “egregious” trading loss on May 10, two months after the biggest U.S. bank by assets passed a Fed stress test that put its loans and securities through a scenario of economic turmoil.
The JPMorgan chief has been one of the most vocal critics of the heightened capital requirements that have emerged in the aftermath of the crisis. In June, Dimon publicly challenged Fed Chairman Ben S. Bernanke on the new regulations, asking whether he had “a fear like I do” that overzealous regulation “will be the reason it took so long that our banks, our credit, our businesses and most importantly job creation to start going again. Is this holding us back at this point?”
Fed officials have shown no sign that they are yielding to bankers’ complaints on stringent capital rules. The 2012 stress test forced bankers to measure their capital against a deep recession and severe market shock.
“There’s nothing that Bill Dudley would rather have to do less than bail out JPMorgan,” said Mark Gertler, an economics professor at New York University. “This makes the case as clearly as one could for financial oversight,” despite the “unbelievable” public relations campaign by the banks for less stringent rules.
Gertler, who serves on the New York Fed’s economic advisory committee, said it’s “important” for the Fed to have relationships with bankers, though regulators “should balance it with more distance.”
The Fed revised its rules for reserve bank directors in 2009, saying those who represent public borrowers can no longer have any association with banks.
Fed Criticized
The change came after the Fed was criticized for granting a waiver allowing former Goldman Sachs Group Inc. Chairman Stephen Friedman to remain on the New York Fed’s board representing the public following the designation of Goldman Sachs as a bank holding company in September 208. Goldman came under the New York Fed’s supervision, making Friedman ineligible for his post. He received a waiver to stay on, later adding to his Goldman stock as the firm benefited from Fed emergency programs.
The New York Fed’s board later restricted bankers from playing any role in bank supervision or appointing its leaders in order to avoid the appearance of a conflict.
“We have to take appearance of conflict really seriously because it does affect the institution by creating questions about our credibility,” Dudley said in the September interview. He added that the central bank’s actions have been examined “extraordinarily carefully,” and no “meaningful untoward behavior” has been revealed.
The GAO said in October that director representation as mandated by the Federal Reserve Act “creates an appearance of conflict of interest.” Banks in each district select six directors, including the three bankers. The remaining three are appointed by the Board of Governors in Washington.
“The fundamental question is whether you want to have financial services executives on district bank boards?” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. “If you think there is a role, I don’t think this would rule Jamie Dimon out as an industry representative.”
