Journal’s Accountability Reporting Gets a Major Scalp

That didn’t take long.

Stephen Friedman, the New York Fed chairman and Goldman Sachs director shareholder, whose conflicts were exposed by the Journal on Monday, resigned from the Fed.

It’s a score for the WSJ, reporters Kate Kelly and Jon Hilsenrath, and accountability reporting in general.

Friedman, remember, got caught up in the conflict after Goldman became a bank holding company. Holding his position and shares was a violation of Fed rules, for which he sought a waiver, one he eventually got. But not before he bought tens of thousands more Goldman shares, which have since risen in value sharply.

The Journal’s story today again uses the column inches to focus on the troublesome structure of the Federal Reserve, which has gotten all-too-little attention until this story:

Mr. Friedman’s move shines a light on the unusual role the Fed’s 12 regional banks play in setting the national economic agenda. Under the 1913 law creating the Fed, the regional banks are a mix of public and private interests. Their boards choose the regional banks’ presidents, who, in turn, play a role in setting monetary policy.

The New York Fed’s role is particularly powerful. Its president has a permanent vote on Fed monetary policy. The regional banks also conduct bank examinations.

Each bank’s board has nine members: three chosen by banks to represent the industry, three chosen by banks to represent the broader public, and three chosen by the Fed in Washington to represent the public. Mr. Friedman was in the third class. As chairman, he played a central role in naming Mr. Dudley as successor to Timothy Geithner, who became Treasury secretary. Mr. Dudley, who had been hired by Mr. Geithner to run the New York Fed’s markets desk, is a former Goldman Sachs economist.

Eliot Spitzer, whose newish Slate column has quickly become a must-read, riffed off the Journal’s scoop the other day to write about the problems inherent in the New York Fed.

Just as the millions in AIG bonuses obscured the much more significant issue of the $70 billion-plus in conduit payments authorized by the N.Y. Fed to AIG’s counterparties, the small issue of Friedman’s stock purchase raises very serious issues about the competence and composition of the Federal Reserve of New York, which is the most powerful financial institution most Americans know nothing about.

This is the cauldron that Tim Geithner came out of. If you still wonder why the Obama administration has been so friendly to the banks, this should answer your question:

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.

And Spitzer asks the right rhetorical questions here:

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?

Read his whole column.

The FT and the NYT both cover the Friedman resignation today, but only the NYT credits the Journal for the scoop. It’s not only petty for the FT not to do so, its bad journalism. The paper is withholding critical information from its readers about why this is happening. Bad show.

Switching gears a bit: What pops out to me in the Journal’s victory-lap story is this:

Denis Hughes, the New York Fed’s deputy chairman, and president of the New York branch of the AFL-CIO, will assume the chairman’s post at the bank.

How about a story on that?

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.