The AIG Scandal: Fed Implements New Conflict Standards for Reserve Bank Directors

Zero Hedge

It is more than a little amusing to see the Fed’s Board of Governors (“BOG”) in Washington announce  changes to the normative standards for Reserve Bank directors on the eve of the Thanksgiving holiday.  The new rules apparently are a direct result of the scandal involving Steve Friedman, the former Goldman Sachs banker who chaired the board of the Federal Reserve Bank of New York during the bailout of AIG. 

Back in May of this year, we wrote the following about Friedman and the de facto control by GS over the FRBNY board in The Institutional Risk Analyst:

“And speaking of the fall of the elites, FRBNY Chairman
Steve Friedman finally resigned yesterday, ending a scandalous period
when the greater community of present and past employees of Goldman
Sachs (NYSE:GS), JPMorgan Chase (NYSE:JPM) and other dealers was
arguably in control of the most important arm of the US central bank.

The fact that the Board of Governors appointed former GS ibanker
Freidman as a “C” class director, who are meant to represent the public
interest and not be past officers of regulated banks, was scandal
enough. But then, when GS formally became a bank holding company last
year, the Board failed to remove Friedman when his conflict became
acute. The Board also failed too to appoint another “C” class director,
making it almost seem that the Board wanted to assist in the GS
operation to influence the operations of a Federal Reserve Bank.

Remember that the board of directors of the FRBNY selected Tim Geithner
as President, who then bailed out AIG to the benefit of GS and the
other OTC derivatives dealers that were facing AIG. That is why a
congressional inquiry is needed to understand just why the Fed Board
and, in particular, Fed Vice Chairman Don Kohn, tolerated the Freidman
conflict and arguably neglected their statutory duty to ensure the
proper governance and operation of a Federal Reserve Bank.”

Now the BOG has set in place new guidelines for Reserve Bank directors that, in theory, would prevent GS shareholders and former employees such a Friedman from serving.  However, it is far from clear to me that these changes will be effective and, more, that the members of the BOG in Washington will actually police Reserve  Bank director conflicts.  In fact, the bailout of GS by Tim Geithner, an act of scanalous theft that was endorsed by the GS  controlled board of the FRBNY and then ratified by the BOG in Washington, could not have been effected had the directors of the FRBNY been doing their jobs.

Under the normative standards for directors in the COSO framework, which are paralell to the officer and director standards of DE law and have been adopted by all US financial institutions, including the Federal Reserve Banks, risk management and the avoidance of conflicts are active requirments for a director. Failure to perform these duties, which relfect the director’s duty of loyalty to the corporation (and not to shareholders, BTW), is cause for removal and even prosecution in extreme cases.  With banks, a director’s failure to protect an insured depository from loss can be reason for removal and prosecution via an enforcement action under 12 CFR. 

The fact that the directors of the FRBNY led by Friedman would allow Tim Geithner and his political sponsors at GS, including current CEO Lloyd Blankfein, former GS CEO Robert Rubin and former GS CEO Hank Paulson, to loot the central bank to rescue GS and other dealers from their monumental stupiditry and creed in dealing with AIG is an outrage.  Tim Geithner should not merely be asked to resign as Treasury Secretary, as several member of Congress have suggested, but he should  be impeached and indicted along with Friedman and the other members of the GS extended political family who engineered the AIG theft.

But this is hardly a new insight.  For those readers of Zero hedge who’ve never had the pleasure, read the comments of Rep. Louis T. McFadden of PA from the 1930s.  He sued the Fed and was the chief sponsor of the McFadden Act of 1927 which sought to bring the Reserve Banks under full federal control and end the monopoly of the banksters.  McFadden, who chaired the Banking and Currency Committee, said on the floor of the House in 1932:

“Mr. Chairman, we have in this Country one of the most corrupt institutions
the world has ever known. I refer to the Federal Reserve Board and the
Federal Reserve Banks, hereinafter called the Fed. The Fed has cheated
the Government of these United States and the people of the United States
out of enough money to pay the Nation’s debt. The depredations and iniquities
of the Fed has cost enough money to pay the National debt several times
over… This evil institution has impoverished and ruined the people of these
United States, has bankrupted itself, and has practically bankrupted our
Government. It has done this through the defects of the law under which
it operates, through the maladministration of that law by the Fed and through
the corrupt practices of the moneyed vultures who control it.”

The battle over corruption inside the Fed and the control of our central bank by the big city banks had been going on for a century and more. That is why the scandal and criminality of the AIG bailout demands the attention of every American.

Happy T-Day

Chris

More articles from Zero Hedge….