Some heavy-hitters are lobbying to get JPMorgan CEO Jamie Dimon to give up his seat on the board of the New York Federal Reserve. And he should — Dimon clearly wasn’t paying attention to the ABCs of banking risk. But if Dimon resigns because his bank lost more than $2 billion, and the story ends there, that would be a shame. Dimon is an embodiment of much deeper problems with the way the regional Fed banks work: In short, bankers have too much say about the financial system at the expense of everyone else. There is simply too much opportunity for all kinds of conflicts of interest.
To hear Jamie Dimon testify before Congress, his bank’s trading debacle is completely unrelated to these matters. In testimony before the Senate last week, he was big on mea-culpas but short on details, insistent that his slip-up in no way diminishes his ability to steady the financial ship of state. Expect more of the same at the House committee hearing today. His prepared testimony is nearly identical.
But a lot of experts aren’t buying it. Former IMF chief economist Simon Johnson has collected more than 37,000 signatures calling for Dimon to get the boot from the NY Fed. Democratic senate nominee Elizabeth Warren says not only should Dimon resign but we should restructure all of Wall Street. She has gathered nearly 122,000 signatures demanding that Congress reinstate the Glass-Steagall law that completely separated commercial banking with its federally insured deposits from the casino-like world of investment banking.
The fact is, the 1913 law creating the central bank was structured to avoid these conflicts. The Federal Reserve System is made up of 12 regional banks, each with nine board members — three of each of three “classes,” A, B, and C. Class A directors are to be from the banking industry and represent large, medium-size, and small banks. Both Class B and Class C directors are supposed to represent non-banking interests — labor, consumers, agriculture, and the like. But bankers select the Class B directors, and the governors of the Federal Reserve select the Class C members, in theory to help ensure their complete independence from the banking industry.
Jonathan Reiss, former head of international bonds for Sanford C. Bernstein & Co. and founder of Analytical Synthesis, says the Fed has fallen woefully short of meeting the goals of independence and diversity. When he talks about a lack of diversity, he doesn’t mean that there aren’t enough women or minorities (there aren’t, but that’s not the point) but that there are too many bankers and CEOs, and they tend to walk in lockstep. We can understand that Class B directors might bear the imprint of the bankers who appoint them. But why are the Class C directors look alikes as well?
A recent government review of the boards simply says that it’s too hard to find candidates. According to the report, the regional Feds recommend just two candidates for each vacancy, not exactly a broad pool. “It’s time for the Federal Reserve Banks to replace the old boy networks with computer networks,” Reiss recently wrote in a piece calling for a Twitter campaign to crowd-source nominees for the regional Fed board members. (All you need to do is tweet #OpenFed.) Or, he says, the Fed could simply make an open call for nominations, much as the newly established Consumer Finance Protection Bureau recently did.
To this day, many Americans are angry that the big banks got such a huge helping hand from the Fed and the US Treasury while the little guy — someone who may have lost a job because of the bad decisions bankers made — is losing his house and didn’t get nearly as good a deal. Could that be because Main Street didn’t have a voice at the table during the long, dark days of the financial blow-up? The fact is, even the so-called people’s directors — those in Class C — are far from free of undue influence from Wall Street. At the New York Fed, the presidents of the Metropolitan Museum of Art, Columbia University, and the non-profit Partnership for New York City are Class C directors. By law, they are not allowed to own any bank stocks. But their organizations regularly raise millions of dollars from financial institutions in New York. ”A large part of the life of the president of Columbia University is devoted to soliciting bankers and other rich businessman for money. That will affect his world view,” says Reiss.
To be clear, no one is specifically alleging that any of these nonprofit leaders have engaged in any kind of quid pro quo while serving on the New York Fed. “The Federal Reserve — both at the Board of Governors level and in New York — sets high ethical standards for its directors in general. But there are apparently no rules that effectively constrain the nature of interaction among directors,” writes Simon Johnson, author of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You. Technically speaking, it would be perfectly legal for them to solicit donations in their “professional roles” from fellow board members. But, he says, “this strikes me as a meaningless distinction.” Over the past eight years, for example, Columbia has received $2 million from JP Morgan.
Congress also tried to circumscribe the activities of Fed board directors to help preserve the independence of the institution. Lobbying is a no-no. “You can express your opinion, you can contribute to campaigns. But you can’t run for office, and you can’t hold a fund-raiser or solicit contributions,” says Reiss. But it is too easy for board members to trample the spirit of the law without breaking it. That’s why some critics say Dimon should have been booted off the board some time ago: He is a leading opponent of the Volcker Rule, which would force banks to shut down any proprietary trading activity. You have to wonder: Why did the Fed turn a blind eye to this blatant lobbying?
Senator Bernard Sanders (I-Vt) is stepping up the heat in Congress to effect change. He’s recently published a list of regional board members whose companies received trillions of dollars in bailout support during the economic crisis in 2008. But much more needs to be done. Even if he sticks around for a while, Dimon is slated to retire from the NY Fed board at the end of the year. Thirty-five other board seats will open up in the regional system. It’s time to look for some fresh blood to fill those seats for the next three years.