Quelle Surprise! GAO Finds the Fed is a Club of Backscratching, Well Connected, White Bankers

Bad place to put your trust ...

Non-Partisan Government Report: Federal Reserve Is Riddled with Corruption and Conflicts of Interest

The non-partisan Government Accountability Office released a report today showing widespread corruption and conflicts of interest in the Federal Reserve.

Senator Sanders – who was instrumental in forcing the Fed to release some details of its lending operations – summarizes:

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. 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. "Clearly it is unacceptable for so few people to wield so much unchecked power," 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.

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.

[T]here 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.

Huffington Post reports:

The report highlights a close relationship between the Fed's regional banks and many of the institutions they were lending to, adding credence to concerns that the financial sector enjoyed a largely consequence-free rescue in the wake of the crisis, thanks to its connections with the federal government.

Dean Baker, co-director of the Center for Economic and Policy Research and a HuffPost blogger, said that the report's findings reflected "an institutionalized conflict of interest" within the Federal Reserve.

"We don't let Comcast appoint people to the FCC. We don't let Pfizer appoint people to the Food and Drug Administration," Baker told HuffPost. The degree to which bankers can assume regulatory responsibility for their own industry, he said, is "without precedent."

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The report notes that compared with other major central banks — including those of Australia, Canada, the United Kingdom and the European Union — the Federal Reserve does relatively little to police conflicts of interest among its personnel.

Australia's central bank, for example, "prohibits directors from working for or having a material financial interest in private financial companies in Australia" — a restriction that the Federal Reserve lacks and that would have prevented several of the directors mentioned in the GAO report from serving holding regional board positions with the Fed.