Spitzer on New York Fed: “The Most Powerful Financial Institution Most Americans Know Nothing About”
May 12th, 2009Via: Slate:
A quasi-independent, public-private body, the New York Fed is the first among equals of the 12 regional Fed branches. Unlike the Washington Federal Reserve Board of Governors, or the other regional fed branches, the N.Y. Fed is active in the markets virtually every day, changing the critical interest rates that determine the liquidity of the markets and the profitability of banks. And, like the other regional branches, it has boundless power to examine, at will, the books of virtually any banking institution and require that wide-ranging actions be taken—from raising capital to stopping lending—to ensure the stability and soundness of the bank. Over the past year, the New York Fed has been responsible for committing trillions of dollars of taxpayer money to resuscitate the coffers of the banks it oversees.
Given the power of the N.Y. Fed, it is time to ask some very hard questions about its recent performance. The first question to ask is: Who is the New York Fed? Who exactly has been running the show? Yes, we all know that Tim Geithner was the president and CEO of the N.Y. Fed from 2003 until his ascension as treasury secretary. But who chose him for that position, and to whom did he report? The N.Y. Fed president reports to, and is chosen by, the Fed board of directors.
So who selected Geithner back in 2003? Well, the Fed board created a select committee to pick the CEO. This committee included none other than Hank Greenberg, then the chairman of AIG; John Whitehead, a former chairman of Goldman Sachs; Walter Shipley, a former chairman of Chase Manhattan Bank, now JPMorgan Chase; and Pete Peterson, a former chairman of Lehman Bros. It was not a group of typical depositors worried about the security of their savings accounts but rather one whose interest was in preserving a capital structure and way of doing business that cried out for—but did not receive—harsh examination from the N.Y. Fed.
The composition of the New York Fed’s board, which supervises the organization and current Chairman Friedman, is equally troubling. The board consists of nine individuals, three chosen by the N.Y. Fed member banks as their own representatives, three chosen by the member banks to represent the public, and three chosen by the national Fed Board of Governors to represent the public. In theory this sounds great: Six board members are “public” representatives.
So whom have the banks chosen to be the public representatives on the board during the past decade, as the crisis developed and unfolded? Dick Fuld, the former chairman of Lehman; Jeff Immelt, the chairman of GE; Gene McGrath, the chairman of Con Edison; Ronay Menschel, the chairwoman of Phipps Houses and also, not insignificantly, the wife of Richard Menschel, a former senior partner at Goldman. Whom did the Board of Governors choose as its public representatives? Steve Friedman, the former chairman of Goldman; Pete Peterson; Jerry Speyer, CEO of real estate giant Tishman Speyer; and Jerry Levin, the former chairman of Time Warner. These were the people who were supposedly representing our interests!
Of course, there have been the occasional nonfinance representatives from academia and labor. But they have been so outnumbered that their presence has done little to alter the direction of the board.
So is it any wonder that the N.Y. Fed has been complicit in the single greatest bailout of poorly managed banks in history? Any wonder that it has given—with virtually no strings attached—practically the entire contents of the Treasury to the very banks whose inability to manage risk has brought our economy to its knees? Any wonder that not a single CEO or senior executive of a major bank has been removed as a condition of hundreds of billions of direct cash and guarantees? Any wonder that, despite its fundamental responsibility to preserve the integrity of the banking system, it sat quietly on the sidelines as the leverage beneath the banks exploded and the capital underlying their investments shrank?
I do not mean to suggest that any of these board members intentionally discharged their duties with the specific goal of benefitting themselves. Rather, what we have seen is disastrous groupthink, a way of looking at the world from the perspective of Wall Street and Wall Street alone. That failure has brought the world economy to the edge of unraveling. And some of Geithner’s early missteps betrayed an inability to get beyond this tunnel vision, such as the idea that the banks need to be first in line to be paid and to be paid in full. We can only hope that Geithner, who, to his credit, did try to raise some of the regulatory issues that mattered while he was at the Fed, is no longer in the mental prison of Lower Manhattan and will have more success now that he has a board of one—President Obama.
Perhaps it is time to calculate what these board members have been paid by their banks in salary and bonuses over the years and seek to have them return it to the public as small compensation for their failed oversight of the N.Y. Fed. And more fundamentally, perhaps it is time to take a hard look at the governing structure and supposed independence of this institution that actually controls the use of our tax dollars and, heaven help us, the fate of our economy.
“Disastrous groupthink”, is the major telling point of this article!
Do you remember the ‘Yes Men’?
“A genderless, loose-knit association of some 300 impostors worldwide who agree their way into the fortified compounds of commerce, ask questions, and then smuggle out the stories.”
These folks would propose ridiculous schemes, like using the waste from a fast food restaurant as the main ingredient for the menu. In an open forum this is madness on the face of it, but because they made their way into an ‘elite’ group of people, their idea was given credibility and actually entertained.
This is the problem, there is a group that thinks that they know, amongst themselves, how to use capitalism, the free market, or ? (I’m having a problem with the definition of the right term.)
And they will take ANY IDEA as possible. This winds them into a vortex of quarterly profit making to the exclusion of all else.
When the ‘really smart economists and investment magicians’ came up with the derivatives and CDO/CDS schemes, no one, (inside the group), looked at them with a critical eye and asked if this was a good idea. They were TOLD that it was a good way to make money and that was all they needed to hear. Granted it could have been put in such a way that they couldn’t really understand it, or back to my main point, since it came from the group of insiders, it was automatically given play.
It may be like the French royalty of the 1700’s, they were so distant from the real world that they didn’t see the peasants coming until it was too late.
“DISASTROUS GROUPTHINK” and now those folks are the ones groupthinking the cure.
How bad will it get?
Specific, serious power-structure research in a Washington Post owned publication. What’s going on? Will someone be fired? Is there war in the Establishment? Spitzer and Greenberg have not been best friends:
<a href=”http://en.wikipedia.org/wiki/Maurice_R._Greenberg#Fraud_allegations”http://en.wikipedia.org/wiki/Maurice_R._Greenberg#Fraud_allegations
Who had Spitzer investigated?
I really like Elliot Spitzer. He’s been a muckracker pointing out the obvious to those willing to listen and DO something with what he knows. He understands power and corruption and stands head over heels over the “appointees” to the U.S. Government AND Banking system. Too bad he was silenced by such a trite transparent scheme of “smear the queer.” Or this case, smear the lustful one.
I dunno whether its worth the time to care about all of the banker games, and who wins and or loses at the “bankers club” poker table that uses taxpayer dollars like chips at a casino.
I read this article (link below) and started thinking about the children of the world as well as the next Seven Generations. And in light of this, I’m going to start putting my energy behind visualizing a future (where these people doing all this crap now really don’t matter in the long run) that does not include these players at all.
I particularly like the graph of the decline in the stock market as per the days and nights in the Mayan calendar. I highly recommend this article (for what my opinion is worth):
http://www.calleman.com/content/articles/RebirthCelebration.htm