GOP Senator Criticizes New York Fed Chairman

WSJ: GOP Senator Criticizes New York Fed Chairman

By JON HILSENRATH

The ranking Republican on the Senate Banking Committee called it "deeply disturbing" that Stephen Friedman, who is chairman of the Federal Reserve Bank of New York and a director of Goldman Sachs Group Inc., bought Goldman shares in December and January.

Sen. Richard Shelby (R., Ala.) said the purchases heightened his intention to increase oversight of the Fed's 12 regional banks.

Richard Shelby

The Wall Street Journal described Mr. Friedman's private and public entanglements in a page-one story Monday. After Goldman became a Fed-regulated bank-holding company, the Fed granted Mr. Friedman a waiver from rules that would have prevented him from holding any Goldman shares.

Regional Fed banks are hybrid institutions, created by Congress in 1913, with boards of directors chosen from the private sector by commercial banks and the Federal Reserve Board. They play an important role in public policy, helping the Fed to set interest rates and supervising commercial banks.

"If we were setting up the system from scratch today, we would never consider this kind of private-sector involvement," said Louis Crandall, economist with Wrightson ICAP LLC, a Wall Street firm specializing in money markets.

Although the financial crisis is prompting a re-examination of Fed governance by members of Congress, one key player said Monday that he doesn't anticipate changes this year. Rep. Barney Frank (D., Mass), chairman of the House Financial Services Committee, said he plans to examine the regional Fed banks with an eye toward altering their unusual structure and the role their presidents play in making monetary policy, but only after the financial crisis is over.

Barney Frank

"I've also got concerns about the role of the regional presidents on the FOMC [the Fed's interest-rate-setting Federal Open Market Committee]," Mr. Frank said. "The fact that the local business community appoints these people, that is a concern." Mr. Frank said that he didn't intend to push the matter this year, because he doesn't want to hamstring the Fed while it is still fighting the crisis.

Mr. Friedman was placed in an unusual position in September, when Goldman was allowed by the Fed to become a regulated bank-holding holding company to help halt its market slide. That put Mr. Friedman in violation of Fed rules that bar regional Fed bank board chairmen -- who are chosen to represent the public -- from owning bank shares or serving as directors or officers of banks. At the request of the New York Fed, the Fed in Washington granted him a waiver from the rule in January. He said last week he would step down from the New York Fed board at the end of this year.

In December, before the waiver was granted, and again in January, after it was granted, Mr. Friedman bought additional Goldman shares.