Copyright © 2011 Vanguard of Freedom
A new audit of the Federal Reserve released today detailed widespread conflicts of interest involving directors of its regional banks. "The most powerful entity in the United States is riddled with conflicts of interest," Sen. Bernie Sanders (I-Vt.) said after reviewing the Government Accountability Office report.
Sanders' Office said the study required by a Sanders Amendment to last year's Wall Street reform law examined Fed practices never before subjected to such independent, expert scrutiny. "The GAO detailed instance after instance of top executives of corporations and financial institutions using their influence as Federal Reserve directors to financially benefit their firms, and, in at least one instance, themselves," a statement said.
The corporate affiliations of Fed directors from such banking and industry giants as General Electric, JP Morgan Chase, and Lehman Brothers pose "reputational risks" to the Federal Reserve System, the report said. Giving the banking industry the power to both elect and serve as Fed directors creates "an appearance of a conflict of interest," the report added.
The 108-page report found that at least 18 specific current and former Fed board members were affiliated with banks and companies that received emergency loans from the Federal Reserve during the financial crisis. In the dry and understated language of auditors, the report noted that there are no restrictions in Fed rules on directors communicating concerns about their respective banks to the staff of the Federal Reserve.
It also said many directors own stock or work directly for banks that are supervised and regulated by the Federal Reserve. The rules, which the Fed has kept secret, let directors tied to banks participate in decisions involving how much interest to charge financial institutions and how much credit to provide healthy banks and institutions in "hazardous" condition.
"Even when situations arise that run afoul of Fed's conflict rules and waivers are granted," the GAO said, "the waivers are kept hidden from the public." The report by the non-partisan research arm of Congress did not name but unambiguously described several individual cases involving Fed directors that created the appearance of a conflict of interest, including:
Stephen Friedman In 2008, the New York Fed approved an application from Goldman Sachs to become a bank holding company giving it access to cheap Fed loans. During the same period, Friedman, chairman of the New York Fed, sat on the Goldman Sachs board of directors and owned Goldman stock, something the Fed's rules prohibited. He received a waiver in late 2008 that was not made public. After Friedman received the waiver, he continued to purchase stock in Goldman from November 2008 through January of 2009 unbeknownst to the Fed, according to the GAO.
Jeffrey Immelt The Federal Reserve Bank of New York consulted with General Electric on the creation of the Commercial Paper Funding Facility. The Fed later provided $16 billion in financing for GE under the emergency lending program while Immelt, GE's CEO, served as a director on the board of the Federal Reserve Bank of New York.
Jamie Dimon The CEO of JP Morgan Chase served on the board of the Federal Reserve Bank of New York at the same time that his bank received emergency loans from the Fed and was used by the Fed as a clearing bank for the Fed's emergency lending programs. In 2008, the Fed provided JP Morgan Chase with $29 billion in financing to acquire Bear Stearns. At the time, Dimon persuaded the Fed to provide JP Morgan Chase with an 18-month exemption from risk-based leverage and capital requirements. He also convinced the Fed to take risky mortgage-related assets off of Bear Stearns balance sheet before JP Morgan Chase acquired this troubled investment bank.
In summary the GAO report found:
· The affiliations of the Federal Reserve's board of directors with financial firms continue to pose "reputational risks" to the Federal Reserve System.
· The policy of the Federal Reserve to give members of the banking industry the power to both elect and serve on the Federal Reserve's board of directors creates "an appearance of a conflict of interest."
· The GAO identified 18 former and current members of the Federal Reserve's board affiliated with banks and companies that received emergency loans from the Federal Reserve during the financial crisis including General Electric, JP Morgan Chase, and Lehman Brothers.
· There are no restrictions on directors of the Federal Reserve Board from communicating concerns about their respective banks to the staff of the Federal Reserve.
· Many of the Federal Reserve's board of directors own stock or work directly for banks that are supervised and regulated by the Federal Reserve. These board members oversee the Federal Reserve's operations including salary and personnel decisions.
· Under current regulations, Fed directors who are employed by the banking industry or own stock in financial institutions can participate in decisions involving how much interest to charge to financial institutions receiving Fed loans; and the approval or disapproval of
Federal Reserve credit to healthy banks and banks in "hazardous" condition.
· The Federal Reserve does not publicly disclose its conflict of interest regulations or when it grants waivers to its conflict of interest regulations.
· 21 members of the Federal Reserve's board of directors were involved in making personnel decisions in the division of supervision and regulation at the Fed
Further details disclosed by the report include the following:
Compared with central banks in other countries, the Federal Reserve does not do a good job in disclosing potential conflicts of interest and other important transparency issues. The GAO found that such transparency is "essential to the effective and credible functioning of a healthy democracy" and fulfilling the government's responsibility to citizens and taxpayers.
For example, the central bank in Australia prohibits its directors from working for or having a material financial interest in private financial companies located in its country. If such
regulations were in place at the Fed, the CEO of JP Morgan Chase and many other bank
executives would be prohibited from serving on the Fed's board of directors.
The central bank in Canada requires its directors to disclose any potential conflicts of interest as soon as they are discovered; avoid or withdraw from participation in any real, potential, or apparent conflicts of interest; and cannot vote on any matters in which there is a conflict of interest. If these regulations existed at the Fed, Stephen Friedman would have been required to immediately resign from Goldman's board, sell his Goldman stock, or resign from the Fed's board of directors.
Instead, Mr. Friedman was allowed to financially benefit from the increase in Goldman's stock while it received approval from the Fed to become a bank holding company and
received billions in emergency Fed loans.
The central bank in Canada also prohibits its directors from having affiliations with entities that perform clearing and settlement responsibilities in the financial services industry or serve as dealers in government securities. The Fed does not.
These regulations would have prevented both Friedman and Dimon from serving on the Fed's board of directors.
The directors of central banks in Australia, Canada, England and the European Union all have to disclose potential conflicts of interest and must disclose its conflict of interest policies on the internet. The Federal Reserve does not.
The European Central Bank and the central bank in Australia both require its directors to
annually disclose their financial interests. The Fed does not because it does not want to make it "burdensome" for people to serve on its board.
Federal Reserve Banks do not publish public information about vacant director positions. Instead of allowing the public to actively seek to apply to its board, the banking industry recruits most of the candidates to serve on the Federal Reserve's board of directors in private.
In contrast, the central bank in England publicly advertises when it is seeking applications for board directors. The central bank in Canada allows the public to apply for vacant board member positions on the internet.
The GAO also found the following:
· In 2010, the 108 members of the Federal Reserve's board of directors are predominately
white men who are senior executives of financial institutions.
· While Congress has mandated that the Federal Reserve's board of directors consist of experts in labor, consumer protection, agriculture, commerce, and industry, only 11 of the 202 members of the Federal Reserve's board of directors represented labor and consumer interests from 2006-2010.
· When choosing who will serve on its board of directors, the Federal Reserve generally
focuses its search on senior executives, usually CEOs or presidents in the financial industry.
Of the 108 Federal Reserve board directors, 82 were the President or CEO of their company.
· The Federal Reserve claims that it is hard to recruit labor and consumer representatives to its board because many are "politically active," and the Federal Reserve has restrictions on a director's "political activity." Sanders called this "laughable," compared to the political action of CEOs of large financial institutions serving on the Fed's board. For example, Jamie Dimon, the CEO of JP Morgan Chase currently serves on the board of directors at the Federal Reserve Bank of New York. According to the Center for Responsive Politics, Dimon has made over $620,000 in campaign contributions since 1990
"Clearly it is unacceptable for so few people to wield so much unchecked power," Senator Sanders said. "Not only do they run the banks, they run the institutions that regulate the banks."
Sanders said he will work with leading economists to develop legislation to restructure the Fed and bar the banking industry from picking Fed directors. "This is exactly the kind of outrageous behavior by the big banks and Wall Street that is infuriating so many Americans," Sanders said.
Vanguard of Freedom Network / Patriot Action Network / Liberty News Network
this is hard to deal with..
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