By Pam Martens: September 24, 2012

JPMorgan Chase, the Wall Street mega bank now under criminal probes for losing billions of FDIC insured deposits in risky derivative trades, for years has been one of the dinner hosts of an unseemly industry trade and lobby group established by none other than the Federal Reserve Bank of New York, its own regulator. 

On the evening of October 8, 2009, representatives of the largest Wall Street banks enjoyed cocktails and dinner at 270 Park Avenue in Manhattan, the headquarters of JPMorgan Chase.  Bill Hirschberg of Barclays was there; Jeff Feig of Citigroup; Troy Rohrbaugh of JPMorgan; Fabian Shey of UBS and numerous others.  

Also  enjoying the food and conversation were seven officials from their regulator, the New York Fed.  The Fed attendees were: Steven Friedman, Marcus Lee, Susan McLaughlin, Patricia Mosser, Jamie Pfeifer, and Brian Sack.  Michael Nelson, currently Counsel and Senior Vice President of the New York Fed was also in attendance. 

The group is called the Foreign Exchange Committee and its sponsor is the New York Fed, the same body tasked with policing these firms to root out illegal conduct. 

On this particular evening, there is the suggestion that more than foreign exchange may have been discussed.  In attendance was Michael Cross, a high ranking official from the Bank of England who has been centrally involved in the Libor matter.  In Libor-related emails that were released, Cross shows a bias toward self-regulation.  In an internal June 2, 2008 email, Cross stated that “a panel of senior bankers overseeing the BBA process (from within the BBA) is a way to go.” 

The BBA refers to the British Bankers Association, a trade association that oversees Libor, the interest rate setting mechanism for financial products used globally. The public learned earlier this year that the rate has been rigged for years by an international banking cartel. 

It’s curious enough that an official from the Bank of England was at this meeting, but even more curious were two other guests: Susan Gammage of Thomson Reuters and John Nixon of ICAP. 

Thomson Reuters is the company that assists the BBA in calculating and announcing Libor interest rates.  ICAP is an inter-dealer broker implicated in the Libor rate-fixing matter. 

The host of this event, JPMorgan, is under investigation in the Libor matter as is Citigroup, which also sent a representative.  Barclays, which was in attendance, has already admitted to and settled the charges with fines of $453 million by U.K. and U.S. regulators.  UBS is said to have a whistleblower providing evidence to investigators.  Traders from ICAP have been implicated by the Canadian Competition Bureau, as have JPMorgan and Citigroup. 

There are no publicly available minutes from this meeting.  According to the newly enacted charter of the Foreign Exchange Committee posted at the New York Fed’s web site, “Any information disclosed, opinions expressed, or statements made during Committee meetings shall be treated as strictly confidential by members, unless the Committee has authorized release.” (The charter is new but the group has been meeting for decades.)

Whether the banking cartel was meeting this night to discuss the allegations of rigging Libor with their regulator behind closed doors is not known. The New York Fed, which sent seven officials to the meeting, had known about Libor misconduct since 2007 but did not make the matter public.  Nor did it refer the matter to the U.S. Department of Justice.  Timothy Geithner, then President of the New York Fed, is now the U.S. Treasury Secretary. 

Conveniently, the U.S. Treasury Secretary was given the power under Dodd-Frank financial reform to decide if foreign exchange trading should be exempted from derivatives regulation. In April of last year, Geithner requested the full exemption.

On May 20, 1999, Paul Kimball, Chair of the Foreign Exchange Committee, testified before the House Agriculture Subcommittee on Risk Management, Research and Specialty Crops that “The over-the-counter foreign exchange market in the U.S. needs no additional regulation.” 

On February 20, 2009, the group wrote to another regulator, FINRA (Financial Industry Regulatory Authority) effectively telling it to mind its own business when it came to setting leverage limits for retail customers wanting to trade foreign exchange.  The group wrote: “As an initial matter, we would like to note that since foreign currency transactions are not securities and are not subject to the federal securities laws, we therefore question the basis for FINRA’s legal authority to regulate the terms of transactions in this market. While we recognize that FINRA may be able to regulate the sales practices of broker-dealers, even in connection with non-securities, we are not aware of the foundation for FINRA’s authority to control the actual terms of non-securities transactions.” 

The same could certainly be said for the New York Fed in setting up an industry lobby and self-governance group in the field of foreign exchange.  The Commodity Futures Trading Commission (CFTC) is the regulatory body tasked with regulating futures and derivatives.  How the New York Fed carved out a niche for itself and the largest Wall Street firms in the gargantuan $4 trillion a day foreign exchange market should command the interest of Congress.

In August 1976, the Committee on Banking, Currency and Housing released a report titled: Federal Reserve Directors: A Study of Corporate and Banking Influence.  The report drills down to the core of the problem:

“The big business and banking dominance of the Federal Reserve System cited in this report can be traced, in part, to the original Federal Reserve Act, which gave member commercial banks the right to select two-thirds of the directors of each district bank.  But the Board of Governors in Washington must share the responsibility for this imbalance. They appoint the so-called ‘public’ members of the boards of each district bank, appointments which have largely reflected the same narrow interests of the bank-elected members. The parochial nature of the boards affects the public interest across a wide area, ranging from monetary policy to bank regulation.  These are the directors, for example, who initially select the presidents of the 12 district banks—officials who serve on the Federal Open Market Committee, determining the nation’s money supply and the level of economic activity. The selection of these public officials, with such broad and essential policymaking powers, should not be in the hands of boards of directors selected and dominated by private banking and corporate interests.” 

As JPMorgan faces multiple probes on multiple continents, its Chairman and CEO, Jamie Dimon, sits on the Board of Directors of its regulator, the New York Fed.  Coming up on October 3 at 4 p.m. will be another Foreign Exchange Committee event hosted by JPMorgan Chase with the group’s sponsor, the New York Fed, no doubt in attendance.