I am one of those who has felt that the 2008 crisis was a demonstration that the financial system is broken, a corruption of free enterprise and a perpetrator of fraud upon society. I have ranted that what is supposed to be intermediation for trade, commerce and creating means of production has become primarily intermediation for finance.
This week some of the details of the structure and operation of the Fed were summarized in a “brief” 120 page report by the GAO (General Accounting Office) with the very unassuming title: “Federal Reserve Bank Governance: Opportunities Exist to Broaden Director Recruitment Efforts and Increase Transparency.”
Sen. Bernie Sanders (I, VT) responded to the GAO report with what I have called a scathing indictment of the Fed. Sanders lists 18 former and current members of the Federal Reserve’s board affiliated with banks and companies that received emergency loans from the Fed during the financial crisis. He also summarized findings by the GAO that compares the Fed very unfavorably to other central banks. He singled out Stephen Friedman, Jeffrey Immelt and Jamie Dimon specifically. From the senator’s published statement:
Stephen Friedman, the former chairman of the New York Fed's board of directors.
During the end of 2008, the New York Fed approved an application from Goldman Sachs (NYSE:GS) to become a bank holding company giving it access to cheap loans from the Federal Reserve. During this time period, Stephen Friedman, the Chairman of the New York Fed, sat on the Board of Directors of Goldman Sachs, and owned shares in Goldman's stock, something that was prohibited by the Federal Reserve's conflict of interest regulations. Mr. Friedman received a waiver from the Fed's conflict of interest rules in late 2008. This waiver was not publically disclosed. After Mr. Friedman received this waiver, he continued to purchase stock in Goldman from November 2008 through January of 2009. According to the GAO, the Federal Reserve did not know that Mr. Friedman continued to purchases Goldman's stock after his waiver was granted.
Jeffrey Immelt, the CEO of General Electric (NYSE:GE), and board director at the New York Fed
The GAO found that the Federal Reserve Bank of New York consulted with General Electric on the creation of the Commercial Paper Funding Facility established during the financial crisis. The Fed later provided $16 billion in financing to General Electric under this emergency lending program. This occurred while Jeffrey Immelt, the CEO of General Electric, served as a director on the board of the Federal Reserve Bank of New York.
Jamie Dimon, the CEO of JP Morgan Chase (NYSE:JPM) and board director at the New York Federal Reserve
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 while his bank was used by the Fed as a clearinghouse for the Fed's emergency lending programs.
In March of 2008, the Fed provided JP Morgan Chase with $29 billion in financing to acquire Bear Stearns. During this time period, Jamie Dimon was successful in getting the Fed to provide JP Morgan Chase with an 18-month exemption from risk-based leverage and capital requirements. Dimon 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.
Sanders focused on one of the central themes of the GAO report: the lack of diversity on the Fed’s boards. The Fed charter states that the boards are to be populated with a cross section of the economy. This is meant to include all sectors of industry, labor and consumers. The GAO report indicates that they interpret that to include all levels of management. Sanders says that 82 of the 108 board directors were either CEO or president of their company.
The Federal Reserve claims that it is hard to recruit labor and consumer representatives to its board because many are "politically active," and the Federal Reserve has restrictions on a director's "political activity." Sanders called this "laughable," compared to the political action of CEOs of large financial institutions serving on the Fed's board. For example, Jamie Dimon, the CEO of JP Morgan Chase currently serves on the board of directors at the Federal Reserve Bank of New York. According to the Center for Responsive Politics, Dimon has made over $620,000 in campaign contributions since 1990.
Those who have been arguing that the financial system is broken and needs to be fixed may finally get a spotlight shown into some previously dark corners. A blue ribbon panel of economists has agreed to advise Sen. Bernie Sanders (I, VT) on the drafting of legislation to reform the Federal Reserve Bank. The panel includes Nobel Laureate Joseph Stiglitz, William Black, who held several leading legal counsel positions during the investigation of the Savings and Loan fraud in the 1980s, and Dean Baker, who has been identified by Dutch professor Dirk Bezemer as one of twelve people who published analysis years in advance predicting both the timing and the magnitude of the recent financial crisis. A complete list follows in the Sanders’ press release on the subject.
The full list of 13 can be reviewed in the senator’s press release (shown here). At least one person who is on the committee has not been added to the list yet. Bill Black has advised me that L. Randall Wray, professor at the University of Missouri Kansas City is also on the panel. So the panel is currently at least 14 and probably growing.
Perhaps, finally, a necessary convergence is occurring. There is an uprising of popular resentment about the denigration of the Main Street economy (Occupy Wall Street), a GAO report that lays out specific flaws in the organization and operation of the foundation of the financial system (the Federal Reserve) and the start of a credible effort to organize input for a legislative effort that is not driven by the banking lobby.
There is just a glimmer of light here, like a candle in the wind. That light is extremely fragile and the wind can be very powerful. But if this convergence is in fact real, the flame may be able to withstand the wind. Perhaps Elton John will have to write still another set of “Candle in the Wind” lyrics.