"The Friedman Flap: Bad Judgment Threatens The Fed's Independence."
The Friedman Flap
Bad judgment threatens the Fed's independence.
Stephen Friedman has appropriately resigned as chairman of the New York Federal Reserve Bank, amid a flap over his ownership of Goldman Sachs shares. But now he and others are also claiming that Mr. Friedman did nothing wrong, so it's worth clarifying the real nature of the blunder that he and Federal Reserve Vice Chairman Donald Kohn committed. To wit, they have risked compromising the Fed's political independence.
Fed rules bar certain directors of the 12 regional Fed banks from owning shares in companies regulated by the Fed. Mr. Friedman owned about 46,000 Goldman shares and was a Goldman director, but that violated no rules when Goldman was a broker-dealer regulated by the Securities and Exchange Commission. But Mr. Friedman became subject to that ban when Goldman Sachs applied to become a bank holding company last autumn.
New York Fed officials then applied to the Washington Fed for a conflict-of-interest waiver, and Mr. Kohn granted it in January. The Fed's logic was that the conflict wasn't created by any action of Mr. Friedman, the financial system was in crisis, and the New York Fed needed a new president if Timothy Geithner became Treasury Secretary. So Fed officials say Mr. Kohn concluded that the benefit from the continuity of keeping Mr. Friedman outweighed the conflict of interest.
Mr. Friedman also purchased 52,600 additional Goldman shares without informing the Fed. After The Wall Street Journal reported those purchases last week, Mr. Friedman resigned on Thursday, only to claim a day later at Goldman's annual meeting that this was much ado about nothing. We don't think Mr. Friedman was working the system to get rich. He's already rich, and he has always struck us as a straight arrow.
The problem is the politics of all this. Half of the financial world already thinks Goldman runs the U.S. Treasury and Fed, however unfairly. The American public is furious about the bailouts of AIG and banks, engineered by the Fed and Treasury, that have helped the likes of Goldman Sachs. And guess who Mr. Friedman's search committee picked as Mr. Geithner's successor when he left to run Treasury? Another Goldman alum, William Dudley. Yet with all of this in the political air, Mr. Friedman tried to stay in the New York Fed post at least through the end of 2009, and Mr. Kohn granted the waiver. It's hard to imagine a more politically obtuse judgment.
Their behavior has handed a sword to those in Congress who have long wanted to exert more political control over the 12 regional Fed bank presidents. Unlike Federal Reserve governors, the regional presidents aren't appointed by the U.S. President and confirmed by the Senate. They are appointed by their regional bank boards. They nonetheless serve, on a rotating basis, on the Fed's Open Market Committee that sets monetary policy, and the New York Fed president is Vice Chairman of the FOMC. This structure was designed under the Federal Reserve Act of 1913 to help insulate the Fed from political pressure, and it has worked well.
This insulation is especially important now, given how Mr. Kohn and Chairman Ben Bernanke have made the Fed an arm of the Treasury over the last 18 months. The Washington Fed has immersed itself deeply into fiscal policy and recently decided, for the first time since the early 1950s, to directly monetize U.S. debt by buying Treasury securities. Barney Frank would love to get more control over the regional banks to make them more amenable to political pressure as well, and the Friedman flap has given the politicians an opening.
At least Mr. Friedman is gone, but for all the harm he has done to the Fed's political independence, Mr. Kohn should resign too.
Bad judgment threatens the Fed's independence.
Stephen Friedman has appropriately resigned as chairman of the New York Federal Reserve Bank, amid a flap over his ownership of Goldman Sachs shares. But now he and others are also claiming that Mr. Friedman did nothing wrong, so it's worth clarifying the real nature of the blunder that he and Federal Reserve Vice Chairman Donald Kohn committed. To wit, they have risked compromising the Fed's political independence.
Fed rules bar certain directors of the 12 regional Fed banks from owning shares in companies regulated by the Fed. Mr. Friedman owned about 46,000 Goldman shares and was a Goldman director, but that violated no rules when Goldman was a broker-dealer regulated by the Securities and Exchange Commission. But Mr. Friedman became subject to that ban when Goldman Sachs applied to become a bank holding company last autumn.
New York Fed officials then applied to the Washington Fed for a conflict-of-interest waiver, and Mr. Kohn granted it in January. The Fed's logic was that the conflict wasn't created by any action of Mr. Friedman, the financial system was in crisis, and the New York Fed needed a new president if Timothy Geithner became Treasury Secretary. So Fed officials say Mr. Kohn concluded that the benefit from the continuity of keeping Mr. Friedman outweighed the conflict of interest.
Mr. Friedman also purchased 52,600 additional Goldman shares without informing the Fed. After The Wall Street Journal reported those purchases last week, Mr. Friedman resigned on Thursday, only to claim a day later at Goldman's annual meeting that this was much ado about nothing. We don't think Mr. Friedman was working the system to get rich. He's already rich, and he has always struck us as a straight arrow.
The problem is the politics of all this. Half of the financial world already thinks Goldman runs the U.S. Treasury and Fed, however unfairly. The American public is furious about the bailouts of AIG and banks, engineered by the Fed and Treasury, that have helped the likes of Goldman Sachs. And guess who Mr. Friedman's search committee picked as Mr. Geithner's successor when he left to run Treasury? Another Goldman alum, William Dudley. Yet with all of this in the political air, Mr. Friedman tried to stay in the New York Fed post at least through the end of 2009, and Mr. Kohn granted the waiver. It's hard to imagine a more politically obtuse judgment.
Their behavior has handed a sword to those in Congress who have long wanted to exert more political control over the 12 regional Fed bank presidents. Unlike Federal Reserve governors, the regional presidents aren't appointed by the U.S. President and confirmed by the Senate. They are appointed by their regional bank boards. They nonetheless serve, on a rotating basis, on the Fed's Open Market Committee that sets monetary policy, and the New York Fed president is Vice Chairman of the FOMC. This structure was designed under the Federal Reserve Act of 1913 to help insulate the Fed from political pressure, and it has worked well.
This insulation is especially important now, given how Mr. Kohn and Chairman Ben Bernanke have made the Fed an arm of the Treasury over the last 18 months. The Washington Fed has immersed itself deeply into fiscal policy and recently decided, for the first time since the early 1950s, to directly monetize U.S. debt by buying Treasury securities. Barney Frank would love to get more control over the regional banks to make them more amenable to political pressure as well, and the Friedman flap has given the politicians an opening.
At least Mr. Friedman is gone, but for all the harm he has done to the Fed's political independence, Mr. Kohn should resign too.
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posted by KYJurisDoctor at 9:49 PM
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