In an interview Thursday on PBS NewsHour, Jeffrey Brown and Treasury Secretary Tim Geithner had the following exchange:
“JEFFREY BROWN: Do you think Jamie Dimon should be off the board [of the New York Federal Reserve Board]?
TIMOTHY GEITHNER: Well, that’s a question he’ll have to make and the Fed will have to make. But again, on the basic point, which is it is very important, particularly given the damage caused by the crisis, that our system of oversight and safeguards and the enforcement authorities have not just the resources they need, but they are perceived to be above any political influence and have the independence and the ability to make sure these reforms are tough and effective so we protect the American people, again, from a crisis like this. And we’re going to, we’re going to do that.”
In the diplomatic language of Treasury communications, Mr. Geithner just told Jamie Dimon to resign from the New York Fed board (here is the current board composition). It looks bad – and it is bad – to have him on the board of this key part of the Federal Reserve System at a time when his bank is under investigation with regard to its large trading losses and the apparent failure of its risk management system. (Update: Mr. Dimon is on the Management and Budget Committee of the NY Fed board; 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)”.)
Mr. Geithner’s call is a major and perhaps unprecedented development which can go in one of two ways.
If Mr. Dimon resigns, that is a major humiliation and recognition – at the highest levels of government – that even the country’s best connected banker has overstepped his limits. This would be a major victory for democracy and a step towards reopening the debate on financial reform, including introducing more restrictions on what global megabanks can do.
In modern American politics, symbols and substance are hard to disentangle. The big banks have won many rounds, so many times in recent years – including with the help of Mr. Geithner at key moments during the Dodd-Frank debate, in subsequent discussions over capital requirements, and with regard to design and potential implementation of the Volcker Rule (which would limit proprietary trading and other forms of excessive risk taking by big banks). If Mr. Dimon resigns, this could help open the doors to a broader reevaluation of power in the hands of Too Big To Fail banks – and how they undermine the rest of our economy.
If, as seems more likely, Mr. Dimon stays in place, that would be a great victory for the big banks – and a reminder of who is really in charge of the country. Mr. Geithner will be forced to walk back from his statement; that would not exactly inspire confidence in our officials – or help President Obama get re-elected.
Keep in mind that Mr. Dimon himself decided to transform the relevant part of JP Morgan Chase into a risk-taking operation – and it is the people he chose and the systems he put in place that have now blown up.
The entire record of recent interactions between JP Morgan Chase and the New York Federal Reserve will presumably be looked at by investigators – including the total number of meetings, the precise content, and the involvement of Mr. Dimon himself. For example, how often did Mr. Dimon meet with Bill Dudley, president of the New York Fed, over the past 12 months, either one-on-one or in a group meeting? What exactly was discussed? How did any of these interactions filter down into the supervisory process?
We need an independent investigation of the JP Morgan losses – as I argued Thursday morning on NYT.com’s Economix blog. This investigation should examine, among other things, the relationship between Mr. Dimon, his bank, and the New York Fed.
Who will prove more powerful, Jamie Dimon or Tim Geithner?
This post originally appeared at The Baseline Scenario and is posted with permission.