Guest Post: The New York Fed Attempts A Facelift

Several weeks back, I grew a pair and approached The Center Lane's John Burke with the prospect of a guest post here on Jr Deputy Accountant because I am always impressed with his thorough and spot-on analysis. Plus his Photoshop creations tend to make me LOL every time. I should thank StockTwits for introducing us in the first place; were it not for the viral quality of a couple well-placed $$s, I may have never found John's work (or maybe he found me, who remembers?). His site is highly recommended and if I had more free time, I wouldn't have to lie here and say
I read it consistently. I'm happy to say John has broken the JDA guest post cherry (who would want to be associated with this potty-mouthed, Fedbashing site?) and hope you appreciate John's thoughts as much as I do.


The New York Fed Attempts A Facelift

By John T. Burke

Of the 12 regional banks in the Federal Reserve system, the Federal Reserve Bank of New York is obviously the most powerful, since it oversees the investment banks on Wall Street. As a result, there have been longstanding criticisms that the New York Fed’s relationship with those banks has been more than a little cozy. The New York Fed’s own board consists of nine individuals. Three of these are Class A directors who represent (and were elected by) the member banks. These people are: Jamie Dimon (CEO of J.P. Morgan Chase), Charles Wait (CEO of The Adirondack Trust Company in Saratoga Springs) and from Puerto Rico (which is under the New York Fed’s jurisdiction) there is Richard Carrion of Banco Popular. Three Class B directors are elected by the member banks to represent “the public” and the three Class C directors are chosen by the (national) Federal Reserve Board of Governors to represent “the public”. There are currently two Class B director vacancies (supposedly representing the public) at the New York Fed since Richard Fuld (the CEO of Lehman Brothers) resigned as his ship was sinking last fall. The other former Class B director Indra Nooyi, seemed a little more appropriate for representing the public since she was the CEO of PepsiCo which is not (yet) in the mortgage-backed securities business. The only sitting Class B director is Jeffrey Immelt, CEO of General Electric. The Class C directors are Lee Bollinger (President of Columbia University), Kathryn Wilde (CEO of the Partnership for New York City) and finally, our star: Denis Hughes (President of the New York State AFL-CIO).

On Monday, Denis M. Hughes was named chairman of the board of the New York Fed. Hughes has been acting chairman since May, when Stephen Friedman resigned due to widespread outrage over the fact that as shareholder and board member of Goldman Sachs, he violated New York Fed policy. You see, once the (national) Fed Board of Governors allowed Goldman Sachs to become a “bank holding company” they fell under the jurisdiction of the New York Fed. As a New York Fed board member (not to mention: chairman) Friedman was supposed to get a waiver to keep his millions of dollars of Goldman stock and remain on Goldman’s board. Although the waiver was requested in October, by December he spotted another 37,300 shares that he just couldn’t resist. So he just went ahead and bought them without the waiver. Although the waiver was eventually granted in January, by late April, Friedman’s conduct added to the mounting concern that the New York Fed seemed to be built on a foundation of conflict of interest.

Prior to Turbo Tim Geithner’s five years as president of the New York Fed, previous presidents, including E. Gerald Corrigan and William J. McDonough left that position to lead investment banking firms. There has been widespread acknowledgement of a “revolving door” between the New York Fed and the Wall Street banks.

Jo Becker and Gretchen Morgenson of The New York Times provided us with a rich history of Turbo Tim’s tenure as president of the New York Fed, discussing the three “no bid” contracts he gave to BlackRock during last fall’s financial crisis and Geithner’s personal friendship with Ralph Schlosstein, who founded BlackRock and remains a large shareholder. On a more general note about the New York Fed, Becker and Morgenson relied on the opinion of an objective expert to explain that institution’s relationship with Wall Street:

Willem H. Buiter, a professor at the London School of Economics and Political Science who caused a stir at a Fed retreat last year with a paper concluding that the Federal Reserve had been co-opted by the financial industry, said the structure ensured that “Wall Street gets what it wants” in its New York president: “A safe pair of hands, someone who is bright, intelligent, hard-working, but not someone who intends to reform the system root and branch.”

After the selection of Hughes as New York Fed chairman was announced, the 40-year member of the International Brotherhood of Electrical Workers explained his responsibilities to James Parks of the AFL-CIO Now Blog:

“My job is to do whatever I can to make sure working families are considered when decisions are made.”

It sounds as though we have a new, “kinder, gentler” New York Fed, doesn’t it?

The reaction of Jon Hilsenrath of The Wall Street Journal, expressed the opinion that the selection of Hughes raises an important legal question:

The Federal Reserve Act (section 4, paragraph 20) says that chairmen of boards overseeing regional Fed banks need to have “tested banking experience.” Mr. Hughes, who is head of the New York branch of the AFL-CIO labor union, doesn’t seem to have that kind of banking experience on his resume. He’s spent most of his professional life as an electrician and union leader.

The law, written in 1913, puts the Fed in a difficult position, because it also dictates (section 4, paragraph 15) that a chairman of a district bank can’t be an officer, director, employee or shareholder in a private bank, a hurdle Mr. Hughes easily clears.

The century-old rules, in other words, say chairmen of regional Fed banks have to have banking experience, but can’t have anything to do with banks – a pretzel of a provision which ties one hand behind the Fed’s back, and the other hand in front.

One solution to the problem would be to rewrite the law. But you’re highly unlikely to hear a Fed official utter those words. If Congress gets started on that, who knows what else it will change?

It will be interesting to see whether a debate ensues over this issue. The easy solution would involve finding examples of other regional Fed chairpersons who similarly lacked “tested banking experience”.

In the mean time, the New York Fed has now provided us with this handy map illustrating different types of loan deficiencies as they appear across the country. Here’s how they explain it at their website:

The U.S. Credit Conditions section offers new interactive maps and data on auto and student loan delinquencies, and mortgage “roll” rates. These features complement existing maps and spreadsheets on mortgage foreclosures and delinquencies, measures of subprime and alt-A mortgages and bank credit card delinquencies. The data are available at the state and county level.

This information is aimed at helping government agencies, community groups, commercial institutions and other practitioners better understand, monitor and respond to local conditions associated with foreclosures and credit and mortgage delinquencies.

“Our goal is that a wide range of decision makers in the public and private sectors will use this information to advance their efforts to resolve delinquency and foreclosure problems,” said Erica L. Groshen, vice president and director of Regional Affairs at the New York Fed.

Now you can watch the entire country go broke in living color, courtesy of the new, kinder, gentler, Federal Reserve Bank of New York.

(editor's note: if you're addicted to the stuff, John may also be found on Twitter @isunburn)

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.


Anonymous said...

Nice to see guest posts JR.

And quality stuff too.

Here's what happens when Joe Average tries to morph into Turbo Tim:

Tax Court Rejects Taxpayer's Attempt to Use Geithner's TurboTax Defense


[Senator Bernie]Sanders Rips Bernanke Nomination: "He Was Asleep At The Wheel"


And now they want to nominate a non GS person to head the new york fed?


I'm so glad everything is fixed now. I am sure with this one enormous and noble gesture that all Corp-Gov merger conspiracy theories are now repudiated, and I can put that foil hat back on the rack in the back shed and go back to guzzling beer on weekends.

Anonymous said...

As the Reserve Banks' functions have evolved, a person with "tested banking experience" has come to mean someone who can read a financial statement and knows which side of a check to sign and which side to indorse.