Non-Partisan Government Report: Federal Reserve Is Riddled with Corruption and Conflicts of Interest
October 21st, 2011
Cartoon lambasting the Federal Reserve from 1916 – a year before the Fed was created.
(WashingtonsBlog) – 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.”
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.
Fed “Independence”: A Bad Joke
Also today, the senior S&L prosecutor (and professor of economics and law) Bill Black writes – in connection with the Federal Reserve and Bank of America’s initiation of a plan to dump billions of dollars of losses on the American people:
The sad fact is that very few Americans will be surprised that the Fed represented the interests of the SDIs even though they were directly contrary to the interests of the nation. The Fed’s constant demands for (and celebration of) “independence” from democratic government, combined with slavish dependence on and service to the CEOs of the SDIs has gone beyond scandal to the point of farce. I suggest organized “laugh ins” whenever Fed spokespersons prate about their “independence.”
A Laundry List of Bad Behavior
Robert D. Auerbach – an economist with the U.S. House of Representatives Financial Services Committee for eleven years, assisting with oversight of the Federal Reserve, and subsequently Professor of Public Affairs at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin – provided additional examples of the Fed’s dishonest behavior yesterday:
Blocking large parts of the Federal Reserve from GAO audits
House Committee on Banking, Finance and Urban Affairs Chairman Henry Reuss (D, Wisconsin) proposed a GAO audit of the Fed in 1976. The Fed orchestrated a massive campaign using the officials of the private banks it regulates to lobby to kill the audit bill. The Fed won. The bill could not garner enough support to pass out of the Committee. It passed the Government Operations Committee two years later, only after glaring no-audit barriers for Fed monetary policy and international operations were added.
Billions of dollars can be made from inside information leaks from the Fed’s monetary policy operations. One necessary step to stop leaks is to severely limit inside information on future Fed policy to a few Fed employees.
This has not happened. Congress received information in 1997 that non-Federal Reserve employees attended Federal Reserve meetings where inside information was discussed. Banking Committee Chairman/Ranking Member Henry B. Gonzalez (D, Texas) and Congressmen Maurice Hinchey (D, New York) asked Fed Chairman Alan Greenspan about the apparent leak of discount rate information. Greenspan admitted that non-Fed people including “central bankers from Bulgaria, China, the Czech Republic, Hungary, Poland, Romania and Russia” had attended Federal Reserve meetings where the Fed’s future interest rate policy was discussed. Greenspan’s letter (4/25/1997) contained a 23-page enclosure listing hundreds of employees at the Board of Governors in Washington, D.C. and in the Federal Reserve Banks around the country who have access to at least some inside Fed policy information.
Destroying Fed records
In 1995 Greenspan held a non-recorded vote – no finger prints – to destroy the source transcripts of the Fed’s policy-making committee, the Federal Open market Committee (FOMC). I was informed November 1, 2001 by Donald Kohn, the future Fed Vice Chairman, that this destruction would continue and that the Fed considered the destruction to be legal.
The Fed’s shredding machines destroyed the 1995 source FOMC transcripts of Fed officials who bypassed the Congress and voted for a $5 billion loan to Mexico collateralized by revenue from Mexico’s oil industry. When the potential loan become public the peso stopped falling, and the loan was not made.
No audits can be made of source FOMC transcripts that were formerly sent to the National Archives and Records Administration because the transcripts are destroyed. That is not an urban legend.
Corrupted bookkeeping at Fed vaults
A 1997 Gonzalez investigation, assisted by the GAO, found extensive corrupt accounting at the cash section of the Los Angeles branch of the San Francisco Fed Bank with dire possibilities at other Fed vault facilities. Greenspan informed Gonzalez that nearly $500 thousand had been stolen from Fed vaults by Fed employees from 1987 to 1996. The Gonzalez/GAO investigation indicated this was an understatement.
The Fed Banks’ vaults contain uncirculated currency and coin transferred from the Bureau of Engraving and Printing and cash from banks throughout the country. The Fed district banks and branches need to be audited with GAO personnel who are trained and experienced in central bank operations and auditing. When will these audits be done and reported to the Congress or will Bernanke dismiss this national security problem as an urban legend?
Bernanke replied in a similar manner at a previous Congressional hearing (2/23/2010) to Congressman Paul’s questions based on material in my book, Deception and Abuse at the Fed (2008).
The Federal Reserve: As Corrupt As a Banana Republic Bank
I noted last week:
Nobel prize-winning economist Joseph Stiglitz strongly dislikes the Fed:
Joseph Stiglitz – former head economist at the World Bank and a nobel-prize winner – said yesterday that the very structure of the Federal Reserve system is so fraught with conflicts that it is “corrupt” and undermines democracy.
If we [i.e. the World Bank] had seen a governance structure that corresponds to our Federal Reserve system, we would have been yelling and screaming and saying that country does not deserve any assistance, this is a corrupt governing structure.
Stiglitz pointed out that – if another country had presented a plan to reform its financial system, and included a regulatory regime that copied the makeup of the Federal Reserve system – “it would have been a big signal that something is wrong.”
Stiglitz stressed that the Fed banks have clear conflicts of interest, since the banks are largely governed by a board of directors that includes officers of the very banks they’re supposed to be overseeing:
So, these are the guys who appointed the guy who bailed them out … Is that a conflict of interest?
They would say, ‘no conflict of interest, we were just doing our job. But you have to look at the conflicts of interest”…
The reason you talk about governance is because in a democracy you want people to have confidence … This is a structure that will undermine confidence in a democracy.
Indeed, as I noted Sunday:
Given that the 12 Federal Reserve banks are private – see this, this, this andthis– the giant banks have a huge amount of influence on what the Fed does. Indeed, the money-center banks in New York control the New York Fed, the most powerful Fed bank. Indeed, Jamie Dimon – the head of JP Morgan Chase – is a Director of the New York Fed.
Former Fed officials agree. For example, the former Vice President of Dallas Federal Reserve said that the failure of the government to provide more information about the bailout signals corruption. As ABC writes:
Gerald O’Driscoll, a former vice president at the Federal Reserve Bank of Dallas and a senior fellow at the Cato Institute, a libertarian think tank, said he worried that the failure of the government to provide more information about its rescue spending could signal corruption.
“Nontransparency in government programs is always associated with corruption in other countries, so I don’t see why it wouldn’t be here,” he said.
Source: Washington’s Blog