JPMorgan Chase CEO Jamie Dimon will appear before the Senate Banking Committee on Wednesday to answer questions about his bank’s risk management, or lack thereof—how was it that a too-big-to-fail institution took dangerous gambles that recently resulted in multibillion-dollar losses?
But there are deeper questions likely to come up as well. One is why Dimon is allowed to sit on the New York Federal Reserve’s board of directors, along with several other titans of finance. At the twelve regional Federal Reserve Banks, there are nine-member boards of directors. Six of the seats are selected by banks from the region—although, somewhat hilariously, the banks are supposed to pick three directors to represent their interests, and then three directors to represent “the public’s interest.”
But if the job of the Federal Reserve is to maintain the safety and soundness of Wall Street banks—a task often at odds with the banks’ short-term, greed-driven motives—why are the heads of those institutions allowed to be a part of it at all?
Some new data released Tuesday by Senator Bernie Sanders puts this inherent conflict of interest in sharp relief. Sanders revealed, for the first time, detailed information about which bank executives benefited from Fed actions during the financial crisis, and how much they got.
The Dodd-Frank legislation, thanks to a provision inserted by Sanders, required the nonpartisan Government Accountability Office to study these conflicts of interest at the Fed and issue a report. It did so in October, issuing a detailed study which found that allowing members of the banking industry be on the Federal Reserve’s board of directors creates “an appearance of a conflict of interest” and poses “reputational risks” to the Federal Reserve System.
The GAO laid out several conflicts of interest, but was not required to name specific institutions—but that’s what Sanders released today. He found that during the crisis, at least $4 trillion in zero-interest Federal Reserve loans went to the banks of at least eighteen current and former Federal Reserve regional bank directors.
JPMorgan got a quite a few handouts from the Fed while Dimon sat on the board of directors, Sanders notes. It received $390 billion in emergency Fed funds while it was being used as a clearinghouse for emergency lending programs. It got $29 billion to acquire Bear Stearns, and got an eighteen-month exemption from risk-based leverage and capital requirements. JP Morgan also got the Fed to take risky assets off the Bear Stearns balance sheets before it was acquired.