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June 14, 2012
Sanders Calls for End of Conflicts of Interest on Federal Reserve Boards
    by Robert Kropp

After introducing legislation prohibiting bank executives from serving on Federal Reserve boards, Sen. Sanders of Vermont names 18 Fed directors whose firms benefited from the bailout during the financial crisis.


Jamie Dimon, Chairman and CEO of JP Morgan Chase, appeared before the US Senate banking committee yesterday, supposedly to explain how the bank's London-based investment office had lost more than $2 billion in risky proprietary trading.

In fact, the hearing was notable for the near-absence of hard questions asked by the legislators, although Dimon did tone down his usual vocal opposition to regulation of the financial industry. Apologizing for the trading losses, he said, "We made a mistake. I am absolutely responsible." And he went so far as to say JP Morgan had supported elements of the Dodd-Frank financial reform bill.

While it may seem heartwarming to some to hear the CEO of the nation's largest bank take responsibility for its operations, no mention appears to have been made of additional measures the bank might take to mitigate further risk. Dimon made no mention, for instance, of appointing an independent director to replace him as Chairman, despite a 40% shareowner vote in favor of it at the bank's recent annual general meeting.

A Senator who has proven himself unafraid of taking on the banking industry is Vermont's Bernie Sanders, who introduced legislation last month that would prohibit bank executives from serving on the boards of the nation's 12 Federal Reserve banks.

A provision of Dodd-Frank introduced by Sanders required the US Government Accountability Office (GAO) to review the governance of the Federal Reserve banks. The GAO issued its report last October, stating that the Federal Reserve System should "take additional steps to strengthen controls designed to manage conflicts of interest involving Reserve Bank directors and increase public disclosure of directors' roles and responsibilities." The report did not include specific examples of potential conflicts of interest, nor did it name those who potentially stood to gain by them.

On the eve of Dimon's testimony on Capitol Hill, Sanders publicized the names. "During the financial crisis, at least 18 former and current directors from Federal Reserve Banks worked in banks and corporations that collectively received over $4 trillion in low-interest loans from the Federal Reserve," the report states.

Dimon himself has been on the board of the Federal Reserve Bank of New York since 2007. JP Morgan Chase received $391 billion in financial assistance from the Fed during the financial crisis, and an additional $29 billion in financing to acquire Bear Stearns.

The list goes on to include such high-profile banking and business executives such as Jeffrey Immelt of GE, Stephen Friedman of Goldman Sachs, Sanford Weill of Citigroup, and Richard Fuld of the now-defunct Lehman Brothers.

"Do we want our financial institutions to be the world's largest gambling casino, or do we want them to be integrated into a productive economy, creating jobs?" Sanders asked.

Conflicts of interest, whether it be the CEO of an institution overseeing his own job performance or the presence on boards of the Fed of those who stand to benefit from its decisions, will have to be resolved before such a vision can be realized. The legislation proposed by Sen. Sanders is a step toward such a resolution, as are the calls for meaningful corporate governance by 40% of JP Morgan's shareowners.

 

 
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