Conflict Of Interest

There is just no way that this ought to have been allowed:

“The Federal Reserve Bank of New York shaped Washington’s response to the financial crisis late last year, which buoyed Goldman Sachs Group Inc. and other Wall Street firms. Goldman received speedy approval to become a bank holding company in September and a $10 billion capital injection soon after.

During that time, the New York Fed’s chairman, Stephen Friedman, sat on Goldman’s board and had a large holding in Goldman stock, which because of Goldman’s new status as a bank holding company was a violation of Federal Reserve policy.

The New York Fed asked for a waiver, which, after about 2 1/2 months, the Fed granted. While it was weighing the request, Mr. Friedman bought 37,300 more Goldman shares in December. They’ve since risen $1.7 million in value. (…)

Mr. Friedman, who once ran Goldman, says none of these events involved any conflicts. He says his job as chairman of the New York Fed isn’t a policy-making one, that he didn’t consider his purchases of more Goldman shares to conflict with Fed policy, and bought shares because they were very cheap.”

Whatever Mr. Friedman might think, having a director of the New York Fed serving on the board of Goldman Sachs, and owning 98,600 shares of Goldman Sachs, became an obvious conflict of interest once Goldman became a bank holding company. The New York Fed regulates banks and bank holding companies headquartered in New York, New Jersey, and Fairfield County, Connecticut, and enforces laws governing them, in addition to doing various other things that can affect their share prices. Goldman Sachs is a bank holding company headquartered in New York. I’m not sure how a conflict of interest could be more obvious than that.

In saying this, I do not mean to impugn Mr. Friedman’s motives. I don’t know Mr. Friedman. For all I know, he is a pillar of rectitude and a prince among men. That doesn’t matter. For one thing, owning stock in a company you regulate can influence you without your awareness. In fact, it’s hard to see how owning so much stock that a mere $1 change in the stock price means that your net worth goes up by nearly $100,000 could fail to affect your thinking, however hard you tried.

Moreover, even if you do manage to completely wall your decisions off from any such influence, conscious or unconscious, no one other than God can be certain of that. And if there’s reason for people to wonder whether your decisions are influenced by your stock holdings, those decisions will be suspect.

The legitimacy of the Fed’s decisions is very important. The Fed and its subordinate banks are unaccountable bodies with enormous powers. It matters both that their decisions be, and that they be believed to be, made without undue influence by politicians, bankers, or anyone else. It will not survive otherwise. The fact that it has not seemed to be independent either of politicians or of Wall Street recently is a very big problem. It needs to be dealt with directly. But the least we can expect is that its directors not make things worse by having large and obvious conflicts of interest.