Conflict of Interest is defined by Black's Law Dictionary as:
" A term used in connection with public officials and fiduciaries
and their relationships to matters of private interest or gain to
them. Ethical problems connected therewith are covered by
statutes in most jurisdictions and by federal statutes"
USC Title 18 Chapter 11, section 208 (note 1)
makes it a felony punisable up to 5 five years
for members of the Board of Directors of a Federal
Reserve Bank to make Bank decisions which benefit
their own interests. Attached is a Statement of the
role of Federal Reserve Bank Directors.(note 2)
It's apparent that such notables as J.P.Morgan's James
Dimon and Lehman's Richard Fuld, as directors of the
New York Federal Reserve Bank, will make decisions
which will benefit their companies and themselves.
Senator Christopher Dodd, in a radio broadcast of March
26, 2008 and noted in the New York Post,(note 3) stated
that James Dimon had a coflict of interest, given his
position on the NY FED Board of Directors and that
matter needs to be examined. But Dodd failed to
mention the conflict of interests at the April 4, 2008
Bear Stearns/J.P. Morgan bail-out Senate hearings.
Perhaps it was because Senator Dodd receives political
campaign contributions from none other than Morgan CEO
James Dimon and Lehman CEO Richard Fuld and the
alleged naked short seller Steven A. Cohen of SAC
Capital whose employees contributes a mere $344,000
for Dodd.
Mr. Richard Fuld:
The CEO of Lehman Brothers, was quoted by the Financial
Times of London of June 4, 2008, with having made the
following remarkable statement:
"The federal reserve's decision earlier this year to lend
directly to investment banks should take questions about
Lehman's liquidity off the table"
Let's analyse this statement a bit.
The "federal reserve's decision earlier this year to lend
directly to investment banks" is a reference to the
"primary" facilility extended to Bear Stearns of $25
billion, which turned out to be part of the loans in effect
made to J.P. Morgan of $55 billion. This is so because
Bear Stearns no longer exists and the loans are to J.P.
Morgan now, $29 billion of which is non-recourse.
Apparently the "federal reserve" has decided to now
lend directly to other investmant banks as the need
arises as a matter of policy.
The statement is revealing because Mr. Fuld does not
say that questions of Lehman's liquidity are off the table
because of the soundness of their present assets,
liabilities and cash. He says the liquidity questions are
"off the table" only because of Lehman's expections of
being treated at least as well as J.P.Morgan by the
New York Federal Reserve Bank when and if Lehman
demands bankers welfare (i.e. dole) payments from
the FED and ultimately from the tax payers.
In fact the statement suggests that questions of
liquidity are certainly "on the table" without the New York
FED bailout. Mr. Fuld suggests that if Lehman comes
calling for a $50 billion loan from the FED offering dubious
mortgages which Lehman values at $50 billion, he can
assure Lehman and the public that Lehman will get the
money because Lehman's illiquidity is off the table.
At the end of May, 2008, it was announced that Lehman,
Merrill Lynch, and other giant financial corporations had
their debt rating downgraded by Moody's, Standard and
Poors and Fitch similar to what was done by the rating
agencies to Bear Stearns, on March 14, 2008, the day of
the Bear Stearns crash. This downgrade made the cost
of insuring their debt issues double.
The statement by Fuld above is surely an attempt to quell
fears about Lehman's liquidity. This is similar to what Alan
Schwartz of Bear Stearns did when he told David Faber, two
days before the crash, that there was no liquidity crisis
because Bear Stearns had sufficient liquidity in its own right.
However, there are some important differences between Mr.
Fuld's statement and Mr. Schwartz's statement. Those are:
1. Fuld, like Jamie Dimon of J.P. Morgan, is on the Board of
Directors of the New York FED Bank which made the decision to
extend $55 Billion of loans to J.P. Morgan to buy Bear Stearns.
Bear Stearns CEO Schwartz was not on the NY FED Board.
In fact no one from Bear Stearns is on the Board.
This means that since Fuld, at last count, owns 1.9 million
shares of Lehman, 600,000 Restricted stock units and 900,000
executive stock options,(note 4) (see www.secform4.com), he
will not approve a loan to bail out Lehman other than directly
to Lehman itself. Lehman would not be treated like Bear
Stearns was treated.
Although, Mr. Fuld sold over $320,000,000 worth of stock at
near all time highs in 2006 and 2007, received through the
premature exercise of his employee stock options, he still has
value in his present holdings of approximately $100,000,000.
He surely would not approve a loan to a third party which buys
Lehman at bankruptsy prices which in effect wipes out his
$100,000,000 of equity.
Of course a $50-100 billion loan from the New York FED direct
to Lehman on a non- recourse basis as was the $ 29 billion
loan to J.P. Morgan, would make the stock of Lehman increase
and would eliminate the need for any borrowing or other
raising of capital.
Jamie Dimon:
2. James Dimon holds almost 3 million shares of J.P. Morgan
stock worth over $120 million with taxes already paid and
executive stock options equal in my estimate of another
$70 million. His dispositions of stock equalled $140 million
over the past few years.(note 5) (see www.secform4.com).
Jamie Dimon, like Richard Fuld, was at the luncheon on
March 11, 2008 with Bernanke, Rubin CEO of Citigroup,
Geithner, president of the New York FED, Thain of Merrill
Lynch, and Schwarzman of the Blackstone Group and others.
Some claim that the meeting was about Bear Stearns and
how to handle that situation.
Bernanke, Dimon, and Geithner all testified before the U.S.
Senate Committee on Banking April 4, that they first heard
of liquidity problems at Bear Stearns on the evening of
March 13, 2008.
If they were talking about the solution to Bear Stearns at
the March 11, 2008 luncheon, then their answers before
the Senate Banking Committe were less than truthful.
Perhaps a felony.
Alan Schwartz was not invited to the luncheon on
March 11, 2008. One wonders why.
3. Lehman Bros. is one of the original stock holders of the
New York Federal Reserve Bank, whereas Bear Stears does
not now have any ownership in the NY FED bank.
4. If Fuld approves a loan from the New York FED to Lehman
which he certainly indicated he would do, then he violates
Title 18 section 208. And it can not be any clearer.
Perhaps J.P.M. CEO James Dimon benefited by his decision as
a NY FED director on the Bear Stearns/ JP Morgan bail -out.
Did the stock of J.P. Morgan rise in the days just after
March 17, 2008. It surely did as the market perceived that J.P.
Morgan was a winner on the Bear Stearns deal.
John Olagues
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Footnotes:
1. Title 18 USC Chapter 11 section 206..... Federal criminal
statute on Bribery, Graft and Conflict of Interest.
2. Role of Federal Reserve Bank directors from the Federal
Reserve Bank of New York web site.
3. New York Post march 27, 2008. "Dodd Cites Dimon's NY
FED seat"
4. SEC Form 4 of Mr. Fuld indicating his stock sales and
stock awards granted
5. SEC Form 4 of Mr. Dimon includes stock, options and
restricted stock transactions made by officers and directors.
http://www.optionsforemployees.com/articles/article.php?id=137