WASHINGTON — It's the perception problem regulators at the Federal Reserve Board would rather go away.
The fallout of JPMorgan Chase & Co.'s $2 billion trading loss has reignited old worries of just how close Wall Street is to one of its top regulators, the Federal Reserve Bank of New York. Politicians and consumer activists have called for Jamie Dimon, JPMorgan's chairman and chief executive, to resign from his position as a board director at the New York Fed.
Yet most observers agree that the perceived conflict of interest is just that — a perception that is a far cry from reality. Neither Dimon nor other directors from financial institutions have any role in the Fed's regulatory activities.
Still, the situation begs the question of whether the central bank should do more to distance itself from the institutions it regulates, especially when it comes to bankers who sit on the boards of all 12 Federal Reserve banks.
"Just because it's a perceived conflict of interest doesn't mean it's a real one," said Karen Shaw Petrou, managing partner at Federal Financial Analytics Inc. "It's a perception, but the reality isn't there. The question is: Does the Fed need to cleanse itself even of the perception that isn't right?"
The issue was stirred up again after Elizabeth Warren, the Harvard professor who helped set up the Consumer Financial Protection Bureau and is now running for Senate in Massachusetts, called for Dimon's ouster from the New York Fed.
"After the biggest financial crisis in generations, the American people are frustrated that Wall Street has still not been held accountable and does not appear to consider itself responsible," said Warren, in a statement issued shortly after the bank's CEO appearance on NBC's Meet the Press. "Dimon should resign from his post at the New York Fed to send a signal to the American people that Wall Street bankers get it and to show that they understand the need for responsibility and accountability."
Spokespersons for the New York Fed and JPMorgan Chase declined to comment for this article.
The issue is far from new for Fed officials, who have always tried to strike a balance between keeping the institutions the central bank regulates at arm's length, while also gaining the necessary information it needs to make important policy decisions.
"The Fed has always made the decision that the value it gets from the information outweighs the political cost of the perceived conflict," said Petrou. "If the decision is still right, it's really their call because no one else I think can make that political judgment."
But calls for a change are growing louder.
Treasury Secretary Tim Geithner, a former president of the New York Fed, suggested that the structure of the Fed might be worth reforming.
"The perception is a problem," Geithner said in an interview with PBS NewsHour's Jeffrey Brown on Thursday. "And it's worth trying to figure out how to fix that."
Stalwarts of the Fed disagree, saying such calls are "misguided" and "fairly ignorant" given the Fed's existing structure established by Congress.
"I don't see Jaime Dimon's conflict of interest," said Ernest Patrikis, a partner with White & Case LLP and former general counsel of the New York Federal Reserve. "What's the conflict? He's expected to represent the banks' view, the lenders' view."
Since the Fed's inception in 1913, there has always been a misperception that bankers have controlled the Board of Governors. While there might be influence, observers says it's not so.
I would much rather invest my money with Mr. Dimon. ( The losses JPM have sustained will not materially impact his company but were large enough to taint his image - he will learn from that)
As for Elizabeth Warren, the damage she has done and will do to our economy through the over reaching actions she birthed with the CPFB will make the $2 to $3 billion loss JPM took look small.
Sorry lads but it's time to line up and draw straws, in situations like this, nothing else will do. Of course if there is still true honor in banking then establishing a Bushido and insisting on Seppuku when members fall short of code would go a long way towards restoring public faith in the banking system.