Simon Johnson writes that Timothy Geithner told Jamie Dimon to resign from the board of the Federal Reserve Bank of New York. I saw the interview to which he’s referring, and I would hardly characterize it as that strong.
First, let’s have Johnson give the particulars. This is the excerpt he gives from the interview Geithner gave to the PBS News Hour:
“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.”
Johnson says that “In the diplomatic language of Treasury communications, Mr. Geithner just told Jamie Dimon to resign from the New York Fed board.” Perhaps. But Johnson’s leaving a lot out of Geithner’s answer. The interviewer, Jeffrey Brown, mentioned that Elizabeth Warren has called for Dimon’s resignation from the NY Fed board (unfortunately, they didn’t show Geithner’s face when Warren was brought up). Geithner quickly interrupted that “That’s not a new observation, not a new concern,” as if it would help anyone’s position to say “In fact, people have been concerned about this conflict of interest for years!” So Brown asked again if it’s right to have a major Wall Street banker on the board of the key regulatory body for Wall Street banks. Here was the first half of Geithner’s answer:
TIMOTHY GEITHNER: I think it is true. And I think it’s a problem that that – the structure of the Fed, established 90 years ago, and it’s true for Federal Reserve banks across the country, creates that basic perception. And I think that’s something worth trying to change. But the American people should understand that although the Fed was set up that way, those banks and the members of the board play no role in supervision. They have no role in the writing of the rules, and they play no role in decisions the Fed makes about how to respond to a financial crisis. Their role is a much more limited role, and the role is to help provide a perspective on what’s happening in the economy as a whole. But I agree with you that the, that perception is a problem. And it’s worth trying to figure out how to fix that.
Then you had Geithner’s political answer, the one that has Johnson so excited, afterward.
Let’s pick this apart a bit. Geithner is only really worried about the perception of a conflict of interest at the NY Fed. Keep in mind he ran that organization before becoming Treasury Secretary. And Geithner blames this on the structure of the Fed from 90 years ago. Then he decides to defend Dimon and his fellow bankers on the merits, saying that board members have no role in supervision or rule writing or crisis response.
That’s a crock. Of course the board members have a role. They had the biggest role. They got a vote in selecting the regional bank president – people like Timothy Geithner – who then have control over those policy decisions. This is the heart of the conflict of interest here. The regional fed banks have presidents chosen by bankers. In the case of the New York Fed, Wall Street titans like Jamie Dimon get a vote on who sits in the chair and runs the organization making all of the calls on supervision and rule writing and enforcement. Most of Wall Street was pleased, I’m sure, that bankers like Dimon helped choose Geithner to be in charge when the New York Fed bailed out AIG and gave counter-parties 100% of their payouts.
By the way, five of those regional bank presidents, on a rotating basis, end up on the Federal Open Market Committee, setting monetary policy for the nation. So bankers like Dimon end up playing a role in that as well.
Dodd-Frank partially fixed this by allowing only class B and C directors to play a role in these decisions. Class A directors, i.e. bankers, no longer have a vote on appointing the presidents. And that’s a step forward. But to many there’s still a conflict of interest here, at the very least with the current crop of regional bank presidents. And board members still have a line to the policymakers at the regional banks. Their concerns can get immediate attention. And that filters down into policymaking. The proof of this comes in the actual bank-friendly policymaking we’ve seen from the Federal Reserve and its regional banks since time immemorial.
Geithner was nowhere near as forceful as, say, Sheila Bair, who flat-out said this week that “Having bankers on the boards of regional Fed banks is a problem, period.”
I suppose it’s a good thing that Geithner sees a perception problem. And maybe this was bureaucrat-speak from Geithner to Dimon to get off the board. If so, Elizabeth Warren has achieved a pretty nice victory. But I’m really not so sure, and I know that Geithner is still trying to muddy the waters on the regional bank boards and their impact on Federal Reserve decision-making.