EconoMonitor

Geithner to Dimon: Resign from the Board of the New York Fed

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.

5 Responses to “Geithner to Dimon: Resign from the Board of the New York Fed”

SchofieldMay 18th, 2012 at 9:06 pm

Conflict of interest? No problem increase your campaign finance contribution to Obama. To make sure Romney doesn't raise a stink increase your campaign finance contribution to him too.

llisa2u2May 18th, 2012 at 9:56 pm

Geithner should have had the guts to say "yes" or "no" in simple up-front terms and language. But who does these days? It's such a game of posturing and subtle reference.

Wanda ReneeMay 19th, 2012 at 12:50 am

He should be ask to step down. Schofield is right, it is a conflict of interest and how does someone who is CEO of a bank (TBTF) happen to be on the Board of the FRBNY – it makes no sense. If the Treasury and the Fed knew what was best they would join together to help him pack his stuff. This is so crazy on so many levels. Plus he approved the investment move, which lead to loses – REALLY. WOW – rebuke, recind, get rid of, etc – any way you shape it Dimon should exit quickly and quietly – REAL TRUTH!

AmarMay 19th, 2012 at 6:15 am

Will Jamie Dimon be joining the ranks of Greenspan & Fuld?

The $ 2B loss by J.P. Morgan has seriously dented the reputations of the hallowed institutions of J.P. Morgan and the larger-than-life persona of Dimon.

These kinds of incidents raise the larger issues of integrity, competence and leadership at the most senior levels of the banking and finance sector.

For instance, many of these complex instruments are created at a relatively junior leadership level. At a junior leadership level, they know what the instrument is composed of, yet they do not have the experience to understand the risks and future implications. Meanwhile the senior leaders, who have the experience to understand the risks, probably don't have the vaguest idea about how these instruments are structured. That's competency failure.

There is a failure at the level of top management to accept this ignorance and then do something about it. That's integrity failure.

Top leadership should have the competency to put in the right risk management structures, even though they don't understand the nitty-gritties of the instrument. That does not happen. That's leadership failure.

It’s these issues of integrity, competence and leadership that bought down Lehman Brothers and resulted in many iconic names like Citibank, J.P. Morgan and Goldman Sachs lining up at Capitol Hill with a begging bowl.

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