Jamie Dimon, CEO of JP Morgan Chase, is a member of the board of the New York Federal Reserve Bank. Mr. Dimon's role there is sometimes presented as "advisory" but he sits on the Management and Budget Committee; 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)". His advice apparently extends to important aspects of how the New York Fed operates, including aspects of its personnel policies.
The New York Fed is a key part of our regulatory and supervisory apparatus, involved in overseeing the activities of banks and bank holding companies, like JP Morgan Chase (currently the largest bank in the US). Within the Federal Reserve System, the New York Fed also has some of the deepest expertise on financial markets and complex products, such as derivatives. Almost of the relevant supervision takes place behind closed doors, with representatives of the industry - including big banks - typically taking the position that they should be allowed to operate in a particular way or use various kinds of risk models. The staff of the New York Fed often has a decisive voice in determining what kinds of risks are acceptable for systemically important financial institutions.
In recent weeks, risk management apparently broke down completely at JP Morgan Chase. Even the most sympathetic accounts portray Mr. Dimon as out of touch with large parts of his business. There are also press reports that one or more of Mr. Dimon's hand-picked executives failed to understand and report on risks that became greatly magnified and quickly got out of control. Puzzles remain about what exactly Mr. Dimon did not know and when he did not know it, including the question of whether he disclosed all adverse material information in a timely and appropriate manner. Presumably, the New York Fed will be involved - directly or indirectly - in ongoing and future investigations (including answering questions about what its staff did or did not know).
At the end of last week, Treasury Secretary Tim Geithner called for Mr. Dimon to step down from the board of the New York Fed. Mr. Geithner is former president of the New York Fed and fully understands how the board operates - and how big bankers win friends and influence people. Mr. Geithner spoke in the usual Treasury Department diplomatic code - he suggested there is a "perception" problem that must be addressed. To officials, this is as clear a statement as is needed. As chairman of the Financial Stability Oversight Council, Mr. Geithner is ultimately responsible for the health of the financial system and its systemically important components. He is telling Mr. Dimon to go.
Mr. Dimon is likely to resist, but the blatant conflicts of interest in the current situation are too great. Mr. Dimon should not be in any position to influence or affect an organization that plays such an essential role in overseeing the activities of his company. Given the evident breakdowns in risk management at JP Morgan Chase and the possibility that there were again problems with bank supervision in this instance, we need to have a proper independent investigation - and to changes the parameters of this banker-supervisor relationship going forward.
To have Mr. Dimon involved in overseeing the management of the New York Fed, an organization that oversees his activities, decisions, and potential losses, is no longer acceptable. We do not accept such conflicts of interest in other parts of American society and we should not accept them in this instance.
Simon Johnson is the co-author of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters To You, available from April 3rd. This post is cross-posted from The Baseline Scenario. Read more from the Fiscal Affairs series here.
Follow Simon Johnson on Twitter: www.twitter.com/baselinescene
So now we see the administration calls for more regulations, more oversight, etc. Congress calls for hearings, etc. We have passed Sarbanes Oxley, Frank Dodd and created several new organizations inside the government to create rules and add more regulations. I'll be blunt, there is no rule written that will prevent mistakes. If the bank's experts didn't understand the risks, how could a $100k bank regulator prevent the mistake? Regulators validate that the rules and regulations are followed and those rules are properly followed both before and after a transaction.
While $2b is a lot of money, the bank holds assets of $2t, roughly 1% of total assets. If I had an investment account worth $100k then a loss of $1000 is the equivalent loss. The stock market fluctions are occasionally that large. Look at the Facebook IPO. About $25b was invested and it is down from $38 to about $32 or roughly 15%. That's a loss of over $3.5b.
Frankly, the government is wasting its time and the taxpayers money. They need to fix the tax code and reduce spending and prevent the recession if current laws are let stand.
We should not have banks that operate as investment firms as well. There's too much incentive for them to s.crew over their clients. They should be kept separate from each other and, yes, there should even be regulation to keep these banks from getting so big. Until they do this, the economy is going to keep failing every few years because these 'titans of industry' are going to keep taking more and more risks and running to the federal government when their greedy plans don't work out for them. They know they will be bailed out every time because rich people will not want their currency to become virtually worthless. They need to be allowed to fail WITHOUT taking the rest of the economy down with them. Their greed is a danger to the United States. It's just sad that Republicans spend so little time acknowledging that. They'd rather go after Welfare receivers than deal with people who are threatening the entire economy.
I don't know of any senior executive that hasn't made mistakes! A good senior executive will call his Board, tell them what happened and describe what actions he will take to recover and prevent it from happening again. The Board will provide input and perhaps the plan will change as it is discussed. I'm quite sure that there was wide consensus on the resulting plan.
Jamie as CEO was responsible to execute it and we are seeing the results. Some people were let go, some controls within the bank were changed to prevent this from happening again, shareholders and customers were assured that the bank had plenty of capital to cover the loss and that it didn't affect any customer. Jamie took ownership of the loss and acknowledged it as his responsibility.
I'm quite sure there are actions that have yet to unfold and may become visible over the rest of the year.
Continued.....
If complexity has become so unmanageable, who can get a handle on it?
I'm not a Dimon fan, but if he's not able to figure it out, who can?
Something's wrong with the rules if even the best and the brightest can't play the game.
Ya think?
And the Captain of the Titanic had an almost perfect safety record.
" We do not accept such conflicts of interest in other parts of American society and we should not accept them in this instance."
Except in the Executive branch, Congress, The Supreme Court, State and Local Governments.
Ever since Reagan Made greed and unenlightened self interest civic virtues, the Government has served the Rich.
I feel sorry for people who only work for money
Averice is a soul killer, if you only work for "MORE" you can never be at peace. I get emails and calls from friends I built homes for 30 years ago - I am rich in a way money could never make me.
I am not saying that this is what all rich people do, but I am saying that greed and entitlement is high among the rich.
Maybe it's time to have a "citizen Fed" where the public gets to decide if banks get loans or not. What goes around comes around right?