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Friedman scandal illustrates need for Federal Reserve reform
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Federal Reserve Bank of New York headquarters (AP Photo/Louis Lanzano)
Stephen Friedman, chairman of the Federal Reserve Bank of New York, abruptly resigned on Thursday, days after a Wall Street Journal report exposed his conflict of interest as a director and shareholder of Goldman Sachs. Friedman sat on Goldman’s board when the Federal Reserve granted it approval to become a bank holding company – along with $10 billion in bailout money – during the depths of the financial crisis in late 2008.
Once Goldman became a bank holding company, Friedman’s service on the board of directors became an explicit violation of Federal Reserve policy, since one of the Fed’s primary functions is to regulate banks. Friedman applied for a waiver, which the Fed ultimately granted. While awaiting the waiver, Friedman bought an additional 37,300 Goldman shares, which have since risen in value by $1.7 million.
In a previous column, I examined the alignment of interests between the secretive Federal Reserve and the Wall Street banks that bankroll the campaigns of New York’s congressional delegation. Six of those local representatives sit on the House Financial Services Committee, which is currently considering Ron Paul’s Federal Reserve Transparency Act. Not coincidentally, none of those six have joined 134 of their colleagues in co-sponsoring the bill.
The Federal Reserve Transparency Act (H.R. 1207) would require the first-ever audit of the Fed in its 95-year history. As the Friedman scandal demonstrates, transparency at the Federal Reserve is long overdue. Eliot Spitzer, of all people, calls the Federal Reserve Bank of New York “the most powerful financial institution most Americans know nothing about.” In a recent editorial for Slate, Spitzer shows how this allegedly “independent” governing body is anything but that:
Given the power of the N.Y. Fed, it is time to ask some very hard questions about its recent performance. The first question to ask is: Who is the New York Fed? Who exactly has been running the show? Yes, we all know that Tim Geithner was the president and CEO of the N.Y. Fed from 2003 until his ascension as treasury secretary. But who chose him for that position, and to whom did he report? The N.Y. Fed president reports to, and is chosen by, the Fed board of directors.
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.
As NY Markets Examiner Jennifer Shotts observes, “It still remains curious to me that Lehman was allowed to fail, but Goldman and AIG were propped up. It’s nice to be friends with the right people.
Meanwhile, Fed chairman Ben Bernanke maintains that greater transparency into the Federal Reserve’s activities would be “counterproductive.”
Counterproductive for the Wall Street bankers who pull the Fed’s strings, perhaps. But what about for the rest of us?
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