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Thursday Resignations: New York Fed Chairman Edition

Friday, May 08, 2009

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Rounding out a day of resignations (first Bob Kerrey, then Lee Sander), Stephen Friedman, chairman of the Federal Reserve Bank of New York's board of directors, has resigned effectively immediately.

The resignation follows a Monday Wall Street Journal story highlighting Friedman's 'tangle of overlapping interests' as NY Fed Chair: namely, he was also serving on the board of Goldman Sachs, in which he had a large holding. And it was during his chairmanship, of course, that Goldman got a huge government bailout.

To be sure, the bailout was hardly Friedman's decision. It was made at the federal level...in consultation with a certain Timothy Geithner, then president of the NY Fed. (The NY Fed board ostensibly plays a strictly advisory role to the NY Fed president.)

Friedman's Goldman holdings weren't a problem at first - Goldman was an investment bank, and the NY Fed regulates commercial banks. But when the financial sector crisis began last year, the Federal Reserve quickly converted Goldman to a bank holding company, putting Friedman, by dint of his Goldman holdings, in violation of NY Fed policy.

So Friedman asked the Federal Reserve Board in Washington for a waiver of the policy for the remainder of his term. In the Journal's narrative, the feeling was that the NY Fed had just lost another director (Dick Fuld, who left just before the collapse of Lehman Brothers) and couldn't afford to lose another in the midst of a financial crisis...so the waiver was granted. But while the waiver was being considered, Friedman bought $3 million more in Goldman shares (which have since risen $1.7 million in value).

The NY Fed's executive vice president and general counsel Thomas Baxter says Friedman's purchases of Goldman Sachs stock in December 2008 and January 2009 'did not violate any Federal Reserve statute, rule or policy.' But in his resignation letter today, Friedman says, 'The Federal Reserve System has important work to do and does not need this distraction.'

Former New York Attorney General Eliot Spitzer (no stranger to unfortunate financial transactions) writes this week in his Slate column that the NY Fed in its entirety is structurally flawed because 6 of the 9 seats on its board are appointed by the banks it oversees. The other 3 are appointed by the Federal Reserve Board to represent the public...Friedman was one of those. (Three of the seats appointed by the banks are also supposed to represent the public, but Spitzer points out that the public might not feel terribly well-represented by such past holders of those seats as...Dick Fuld.) Says Spitzer:

So is it any wonder...that, despite its fundamental responsibility to preserve the integrity of the banking system, it sat quietly on the sidelines as the leverage beneath the banks exploded and the capital underlying their investments shrank?

I do not mean to suggest that any of these board members intentionally discharged their duties with the specific goal of benefitting themselves. Rather, what we have seen is disastrous groupthink, a way of looking at the world from the perspective of Wall Street and Wall Street alone.

Whether or not Spitzer is correct in his cynicism about the NY Fed board's public respresentatives, one thing is worrying: right now, with Friedman's departure, half of their seats are currently vacant, according to the New York Fed's website. GE chief Jeff Immelt is the only sitting board member elected by the banks to represent the public, while Columbia University president Lee Bollinger and New York State AFL-CIO president Denis Hughes are the two public representatives selected by the Fed board.

One interesting thing: Hughes is now acting NY Fed board chairman. One wonders what, if anything, it might mean to have a labor leader as chairman.

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