Jaime Dimon and "regulatory capture"

Amidst all the discussion surrounding JP Morgan Chase's bet on corporate debt derivatives going terribly wrong, this from Eliot Spitzer, highlights the severe structural problems in Wall Street. The presence of JP Morgan Chairman Jamie Dimon - who lobbied aggressively to redefine the meaning of hedging under the Volcker Rule that was proposed to curb proprietary trading by deposit taking commercial institutions (banks) - on the board of the New York Federal Reserve should constitute as one of the most egregious and shameful examples of "regulatory capture",

Jamie Dimon sits on the board of the New York Federal Reserve Bank - the very organization that is supposed to oversee his bank’s financial practices, the organization that is supposed to issue all sorts of regulations that control what his bank can do, the very organization he has been lobbying to relax the rules about the bets he wants to make...

The Fed conflict is so obvious that it defies any possible rationalization or explanation. For a decade, the New York Fed has failed to pick up on any of the significant Wall Street threats:  excess leverage, subprime fraud, dangerous concentration in “too big to fail” entities.  Maybe the reason is that the board is controlled by the very voices that have been at the root of the failure. There has been not the slightest voice of protest from the board—yet it is a public organization!

By any yardstick of propriety, leave alone decency, Jamie Dimon and all others similarly placed should recuse themselves from the NY FRB Board. See this, this, this, this, this, and this about how JP Morgan's corporate debt derivatives bet went wrong. See also this on why the New York Fed is rife with conflicts of interest and incentive distortions.

Update 1 (7/7/2012)

The scandal that erupted in the aftermath of revealations that Barclays rigged its interest rate estimates used to calculate LIBOR once again spotlights attention at the rotten core of global banking. 

The London Interbank Offer Rate (LIBOR), which is a measure of the rate at which banks borrow money in the money markets, is released each day by the British Bankers’ Association (BBA), covering 10 currencies and 15 different maturities. The Libor rate is used to set rates for some $800 trillion in global financial transactions from derivatives to consumer lending. More than $10 trillion in loans to businesses and consumers have interest rates based on Libor, with the borrowers paying more or less depending on where Libor is on a particular day. Many derivative contracts are also based on it. The BBA collects the rates at which each bank says it could have borrowed money that day without putting up any security for the loan. The highest and lowest responses are thrown out, and the rest are averaged to produce a number. There is no need for any bank to show that it actually borrowed at the rate it claims.

Barclays rigged the LIBOR by manipulating its estimates to suit its interests. During the financial crisis, it low balled its estimate of borrowing rates so as to reassure everyone of its creditworthiness. At other times, when its trading positions called for lower rates, it lowballed its estimates even if it reduced the interest income received by the bank. The FT was scathing in its verdict,

The bankers involved have betrayed an important public trust – that of keeping an accurate public record of the key market rates that are used to value contracts worth trillions of dollars. They did this to make money and to conceal from the wider world their true cost of borrowing. This was market-rigging on a grand scale. It is hard to think of anything more damning – or more corrosive of the reputation of capitalism.

The always incisive Simon Johnson points to Dennis Kelleher of Better Markets, who has a devastating critique of the major banks that have been colluding to rig the LIBOR,

The Libor interest rate is based on a survey of banks like Barclays.  Those banks know what that the information they provide in that survey sets the Libor rate, which is then used to set the rate for those $800 trillion-plus transactions. What Barclays settled - and what the other banks are being investigated and sued for - is knowingly and intentionally providing false information that they knew would result in a false Libor rate being set. This is not some isolated sales practice or trading strategy. The allegations are of a massive conspiracy involving 20 or so of the biggest banks in the world manipulating one of the most important rates in the world. So this isn't about Libor - this is about Lie-More.

That seems to be the business model for the big global finance houses.  They like to call themselves "banks," but they aren't banks in any traditional sense. They are global behemoths that are not just too-big-to-fail, but also too-big-to-regulate and too-big-to-manage. Take JP Morgan Chase for example. It has a $2.35 trillion balance sheet, more than 270,000 employees worldwide, thousands of legal entities, 554 subsidiaries and, as proved by the recent trading losses in London, a CEO, CFO and management team that has no idea what is going on in their own bank.