By Simon Johnson
Liquidity moves markets!Follow the money. Find the profits!
…I see no grounds for optimism that Mr. Dimon will relinquish his Fed position any time soon. In addition, as a result of recent interactions with former officials and others who know the Fed intimately, I now have three additional substantive governance concerns for the New York Fed that merit further discussion…
First and most important, why didn’t Mr. Dimon step down from the board of the New York Fed in March 2008, when JPMorgan Chase bought Bear Stearns with financial support provided, in part, by the Fed?
Second, I would like to raise the following question about Stephen Friedman, who was previously a Class C director of the New York Fed – and chairman of its board during the intense financial crisis period, from January 2008 through early 2009. (Class C directors are appointed by the Board of Governors, not by bankers, and are subject to different rules.)
According to the rules established by the Federal Reserve Board (see Pages 4-5 of this currently available guide on the Fed’s “Directors—Eligibility, Qualifications, and Rotation,” for this quotation and the one that follows):
“By statute, no Class C director may be a stockholder of any bank. In addition, to give effect to this prohibition, it is the board’s policy that no Class C director may own stock in a bank holding company, foreign bank, Edge Act or agreement corporation, subsidiary of a bank holding company, operating subsidiary of a bank, D.F.M.U., or S.I.F.I. (collectively, together with banks, referred to as “financial stock issuers”).”
(A D.F.M.U. is a designated financial market utility and a S.I.F.I. is a systemically important financial institution; both are categories introduced by the Dodd-Frank legislation, to extend the reach of federal regulators in general and the Fed in particular.)
This looks like a fairly comprehensive ban on holding financial stock, and the same requirements were in effect in 2008, although there are reasonable exceptions for stocks as held typically by diversified mutual funds:
“Class C directors are not disqualified by virtue of indirect ownership interests in financial stock issuers through limited types of widely held, diversified investment vehicles. In particular, Class C directors may hold interests in financial stock issuers through ownership of shares of a mutual fund so long as the mutual fund is registered under the Investment Company Act of 1940 and does not have a stated policy of concentrating in the financial services sector. Class C directors also may own shares of financial stock issuers through other diversified investment funds. For these purposes, an “investment fund” means a mutual fund, common trust fund of a bank, pension or deferred compensation plan, or any other investment fund which is widely held (i.e., more than 100 participants) and where the director has no ability to exercise control over the fund’s investment decisions. “Diversified” means that the fund holds no more than 5 percent of the value of its portfolio in the stock of any one financial stock issuer, and no more than 20 percent in the financial sector.”
But Mr. Friedman at that time was – and still is – a senior executive at Stone Point Capital, where, as a member of the six-person investment committee, he is involved in the fund’s investment decisions. Stone Point Capital specializes in financial-sector investments. For example, its portfolio in 2007 included Atlantic Capital Bank – a commercial bank situated in Georgia, owned by a Dallas-based bank holding company – as well as other financial services companies.
How was Mr. Friedman allowed to own these shares while being a Class C director? …
Third, I have a further question about the role of Lee C. Bollinger, the president of Columbia University, who is a Class C director and current chairman of the board of the Federal Reserve Bank of New York. (I discussed his position more broadly in my June 14 review of Federal Reserve governance.)
According to the Federal Reserve Act (Section 4.20): the chairman of the board of directors of a Federal Reserve Act “shall be a person of tested banking experience.”
Mr. Bollinger is a distinguished First Amendment lawyer and an experienced university administrator. However, he does not have banking experience of any kind. He has not written or spoken publicly about banking or finance matters. As far as I can ascertain, the only interview he has ever given on anything related to banking was his recent conversation with The Wall Street Journal – the primary point of which was to defend Mr. Dimon staying on the New York Fed board. (I have asked Mr. Bollinger’s staff for any of his interviews, speeches or articles – academic or otherwise – on financial matters; they have been most cooperative but have not found anything that I missed.)
Please explain to me how having Mr. Bollinger as chairman of the board of the New York Fed is consistent with the Federal Reserve Act….
These are excerpts from a post, which originally appeared at The Baseline Scenario. View the entire post.
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