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Conflicts on the New York Fed Board

posted by Adam Levitin

The regional federal reserve banks are weird, hybrid creatures, both private bankers' banks and public governmental agents. This hybrid existence means that they have conflicts baked into their DNA--they are both supposed to serve and regulate their member banks. These conflicts have been most patent with the New York Fed. During the AIG bailout, it was represented by the very lawyer who minutes before had been representing the private bank consortium that was trying to arrange a bailout of AIG and which benefitted from the public bailout. Yes, a client can waive conflicts and the lawyer probably knew the deal constraints better than anyone else, but that doesn't mean that the conflicts always should be waived.

The latest manifestation of this problem is FRBNY Director Kathryn Wylde criticizing NYAG Eric Schneiderman for having the chutzpah to sue the hometeam over fraud with MBS and mortgage servicing: 

“It is of concern to the industry that instead of trying to facilitate resolving these issues, you seem to be throwing a wrench into it. Wall Street is our Main Street — love ’em or hate ’em. They are important and we have to make sure we are doing everything we can to support them unless they are doing something indefensible."

Gee, some might just think that what's going on with servicing fraud is indefensible. What does Wylde want? A trail of corpses? Apparently it's not ok to be hating on the hometeam.     

Wylde, of course, is a woman whose salary is paid by the banks. She heads the Partnership for New York City, an influential NYC business booster club. I haven't tracked down their finances, but it's hard to imagine that a fair portion of PFNYC's funding doesn't come from its "partners," which include all of NY's major financial institutions and the law firms that handle their legal work. 

Yves has previously riffed about the way in which Wylde is compromised by PFNYC's ties to the financial services industry, but it strikes me that the problem is by no means limited to Wylde, even if her public statements were pretty revealing. Instead, the problem is with all the selections of the Board of Governors of the Federal Reserve (Bernanke et al.) for the Class C directors, who are appointed by the Board of Governors of the Federal Reserve to represent the "public".  All three Class C directors have a serious conflict of interest because of their day jobs involve hitting up the banks for donations.  

The three--Columbia University President and legal scholar Lee Bollinger, CEO of the Partnership for NYC Kathryn Wylde, and Metropolitan Museum of Art President Emily Rafferty--are all in positions where they are constantly seeking to curry favor with financial institutions in order to get donations.  Universities, business booster organizations, and museums, particularly in NYC, are heavily dependent upon the eleemosynary largess of the Federal Reserve Bank of New York's member banks. Consider how much more BoA or JPM could donate to Columbia or PFNYC or the Metropolitan Museum if they had to pay smaller settlements on their MBS. $1B less in settlement payments could easily translate into substantial gifts to these institutions.

I want to emphasize that I have no reason to think that this conflict has affected the decisions of Bollinger and Rafferty (Wylde seems to be another matter), the mere appearance of such a conflict is troubling, not least because of the critical role of the FRBNY as a regulatory agent.  Put differently, the Board of Governors should really know better than to appoint as Class C governors individuals who need to curry favor with the banks. Don't they have some ethics counsel vetting these nominations? Indeed, I'd be curious to know how the Governors even develop a list of potential Class C directors. My guess is that they get recommendations from the current crew. 

I should mention that there's a similar problem with James Tisch, a class B director elected by member banks to represent the public.  (Does anyone think that the banks would ever choose a Class B director who truly represents the public rather then the banks?  This is asking the foxes to choose the guard to the henhouse.)  Tisch is the President and CEO of Loew's Corporation--which looks to the banks for financing.  More problematic is that Tisch is also a director of CNA Financial Corporation.  That strikes me as posing a conflict with his duty to represent the public to the Fed.  

So what we seem to have is a figleaf of independence on the FRBNY Board.  There are only 3 Class A Directors (representing the banks), as opposed to 2 Class B and 3 Class C directors, so the banks are nominally outvoted, but the banks choose 5 of 8 directors and all of the non-bank directors are in positions where goodwill from the banking industry is important.  

So what is to be done?  Given all the brouhaha that Congressional Republicans have made about the composition of the FSOC for its CFPB veto, one would hope that they would also be concerned about the way in which the FRBNY board has been stacked. But the right move at this point would be for Wylde to resign.  I would say that it is also the right move for the other class C directors. Bollinger and Rafferty should also both resign.  Tisch, the sole Class B director is more complicated, as the very nature of his position is conflict itself. But the persistence of conflicts at the FRBNY is not a situation that should be tolerated. 

 

Comments

One would expect these Fed board apparatchiks to lobby behind close doors for their cronies, but really why are they openly lobbying in the public domain? Beyond the obvious conflict of interest into the territory of a State Attorney General, is there no protocol, or even authority to do this?

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