New York Fed Corporate Governance Failure

I have subscribed to NY Fed email list. When I received an email this morning from NY Fed about resignation of Stephen Friedman as Chairman of NY Fed Board I ignored it. I thought it is a usual resignation and must have taken up some assignment elsewhere.

However, after going through a few blogs and websites, I realised what a story I missed (and what mess we are in). Friedman resigned as there were reports that he was holding Goldman shares and bought more as he was elected to NY Fed!

The Federal Reserve Bank of New York shaped Washington’s response to the financial crisis late last year, which buoyed Goldman Sachs Group Inc. and other Wall Street firms. Goldman received speedy approval to become a bank holding company in September and a $10 billion capital injection soon after.

During that time, the New York Fed’s chairman, Stephen Friedman, sat on Goldman’s board and had a large holding in Goldman stock, which because of Goldman’s new status as a bank holding company was a violation of Federal Reserve policy.

The New York Fed asked for a waiver, which, after about 2½ months, the Fed granted. While it was weighing the request, Mr. Friedman bought 37,300 more Goldman shares in December. They’ve since risen $1.7 million in value.

Well Well Well. What is ironical is NY Fed has a page on corporate governance. Here is another WSJ Article on the issue.

However what takes the cake is this article by Eliot Spitzer is the former governor of the state of New York. He calls it as:

The New York Fed is the most powerful financial institution you’ve never heard of. Look who’s running it.

A quasi-independent, public-private body, the New York Fed is the first among equals of the 12 regional Fed branches. Unlike the Washington Federal Reserve Board of Governors, or the other regional fed branches, the N.Y. Fed is active in the markets virtually every day, changing the critical interest rates that determine the liquidity of the markets and the profitability of banks. And, like the other regional branches, it has boundless power to examine, at will, the books of virtually any banking institution and require that wide-ranging actions be taken—from raising capital to stopping lending—to ensure the stability and soundness of the bank. Over the past year, the New York Fed has been responsible for committing trillions of dollars of taxpayer money to resuscitate the coffers of the banks it oversees.

He says it has 9 board members and is mostly comprises the big fin house chiefs:

The composition of the New York Fed’s board, which supervises the organization and current Chairman Friedman, is equally troubling. The board consists of nine individuals, three chosen by the N.Y. Fed member banks as their own representatives, three chosen by the member banks to represent the public, and three chosen by the national Fed Board of Governors to represent the public. In theory this sounds great: Six board members are “public” representatives.

So whom have the banks chosen to be the public representatives on the board during the past decade, as the crisis developed and unfolded? Dick Fuld, the former chairman of Lehman; Jeff Immelt, the chairman of GE; Gene McGrath, the chairman of Con Edison; Ronay Menschel, the chairwoman of Phipps Houses and also, not insignificantly, the wife of Richard Menschel, a former senior partner at Goldman. Whom did the Board of Governors choose as its public representatives? Steve Friedman, the former chairman of Goldman; Pete Peterson; Jerry Speyer, CEO of real estate giant Tishman Speyer; and Jerry Levin, the former chairman of Time Warner. These were the people who were supposedly representing our interests!

The last line says it all. Here is something on Geithner:

So who selected Geithner back in 2003? Well, the Fed board created a select committee to pick the CEO. This committee included none other than Hank Greenberg, then the chairman of AIG; John Whitehead, a former chairman of Goldman Sachs; Walter Shipley, a former chairman of Chase Manhattan Bank, now JPMorgan Chase; and Pete Peterson, a former chairman of Lehman Bros. It was not a group of typical depositors worried about the security of their savings accounts but rather one whose interest was in preserving a capital structure and way of doing business that cried out for—but did not receive—harsh examination from the N.Y. Fed.

The last line says it all. So far no one looked at NY Fed and its composition. It is suffering from huge conflict of interest. The Board has all the people who  NY Fed basically monitors and regulates. This resignation episode has opened up the issue.

Central Banks are in such a massive problem after this crisis. All the basic ideas of central banking are being thrashed left right and centre.

7 Responses to “New York Fed Corporate Governance Failure”

  1. Valuable Internet Information » New York Fed Corporate Governance Failure « Mostly Economics Says:

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  2. New York Fed Corporate Governance Failure « Mostly Economics | Money Blog : 10 Dollars : Money Articles. Says:

    […] View original here: New York Fed Corporate Governance Failure « Mostly Economics […]

  3. New York City Air Force One Flyover Photo Released | Says:

    […] New York Fed Corporate Governance Failure « Mostly Economics […]

  4. Tirath Says:

    Thanks for this eye opener. Something I always asked. . .
    Who will regulate the regulators?

  5. Buiter criticises Fed Board structure, Bernanke and Summers « Mostly Economics Says:

    […] He says Fed Board Structure only helps banking industry. It is a system which allows regulated to choose regulators. You have regional Fed Board supervising banks and banks in turn serve as board members and shareholders as well. This problem came to surface with NY Fed recently […]

  6. Blinder reviews what central banks should and should not do « Mostly Economics Says:

    […] is a conflict of interest and Blinder says it is highly unusual.  I was first alerted to this issue in NY Fed case last […]

  7. Blinder reviews what central banks should and should not do : An Awkward Corner Says:

    […] is a conflict of interest and Blinder says it is highly unusual.  I was first alerted to this issue in NY Fed case last […]

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