Politics of Fed Setup Come to JPMorgan

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American banker and financier John Pierpont Morgan Sr., center, with his daughter Louisa Morgan and son John Pierpont Morgan Jr.

When banks failed and a broader economic collapse loomed in the panic of 1907, there was no Federal Reserve to come to the rescue. John Pierpont Morgan led a group of bankers in forming a pool of money to bail out stockbrokers and quell the chaos.

Now, 99 years after Congress created the Fed as a lender of last resort to defend against future crises, JPMorgan is the largest U.S. bank and some lawmakers want to sever one bond that ties lenders to the central bank: Executives sitting on the boards at the Fed’s 12 regional banks.

JPMorgan CEO Jamie Dimon, who returned to Congress today to testify for a second time about the firm’s $2 billion trading loss, faces louder criticism that his service since 2007 as a director of the Federal Reserve Bank of New York is a conflict of interest. Vermont Senator Bernie Sanders says letting Dimon and others be part of the entity that oversees Wall Street banks is “a clear example of the fox guarding the hen house.”

While the Federal Reserve Act signed by President Woodrow Wilson specifically included bankers when it created a decentralized institution with a Washington-based Federal Reserve Board and 12 regional banks, Sanders and others have backed bills to end the century-old practice. While the Sanders bill isn’t scheduled for any action, people are talking about it.

“It advances the discussion because of the timing, as clearly Dimon is what raised the issue,” said Mark Calabria, director of financial regulation studies at the Cato Institute and a former Senate Banking Committee aide.

Dimon has given no sign he plans to quit. He told shareholders in Tampa, Florida, last month that the New York Fed’s board of directors is “more of an advisory group.”

Chairman Ben S. Bernanke told Congress this month that the Fed takes a lot of action to negate conflicts of interest, and that the central bank will work with lawmakers to find an alternative if they want to change it.

Current and former district bank presidents, including Narayana Kocherlakota of Minneapolis and James Bullard of St. Louis, say getting input about the markets and economy from the bankers on their boards helps them do their jobs better.

“The creation of the Federal Reserve was controversial, almost a battle between banking interests in New York on the one hand with opposition and a lot of concern from the populist segment in Washington,” said Alfred Broaddus, former president of the Richmond Fed. “Whoever says ‘What’s that guy doing on the board?’ doesn’t know all the background.”

Caroline Salas Gage contributed to this post.

 

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