N.Y. Fed Board Fails to Serve Public Interests

NEW YORK (TheStreet) -- In TheStreet, I have long pointed out the dysfunction of the board of directors overseeing the New York branch of the Federal Reserve board.

Three years ago, Stephen Friedman, the former head of Goldman Sachs (GS), traded Goldman stock while serving on the New York Fed board -- the same board that was playing an intimate role in trying to save Goldman and the entire financial system. He soon left the board.

Over the weekend, Gretchen Morgensen of the New York Times highlighted how Kathryn Wylde, who is the president of the Partnership for New York City and is a New York Fed director, got into a loud disagreement with New York state Attorney General Eric Schneiderman at a funeral last week.

Wylde told Schneiderman she (and by extension the New York Fed) disapproved of his unwillingness to approve a deal between Bank of America (BAC) and several investors suing for shady practices by its Countrywide unit.

The settlement, if not for Schneiderman holding it up, would have prevented future investigations into what kind of shenanigans went on during the mortgage lending heyday of 2005 to 2007.

Wylde apparently thinks that what's good for big Wall Street banks is what's good for New York City, New York State, and the country. If the banks want to sweep a bunch of deceitful practices under the rug, politicians and administrators like her should roll over and accept it.

She defended her line of thinking this way:

"Unlike Detroit, where the industry is cars, and Texas, where it is oil, in [New York State] the primary industry is finance. The people of New York all share in the suffering due to lost tax revenues and reduced economic activity when our major financial institutions are weakened. That is why support for these institutions, insuring balance in the discussion, is very much in the public interest in NY."

Who's Fed Is It?

The question that we need to ask ourselves as a country is: Who should govern our financial system? Over a decade ago, a Democrat president (Bill Clinton) eliminated Glass-Steagall and essentially said: Our banks are smart enough to govern themselves.

For the first eight years of last decade, a Republican president (George W. Bush) allowed a culture of relaxed enforcement to permeate the SEC and other government regulatory bodies with regards to financial system oversight.

And President Obama also backed the same horse when he came into office, by appointing former head of the New York Fed, Tim Geithner, to Treasury Secretary.

But self-governance is not governance. If self-governance worked, there would be no need for boards. The CEO could simply go out to lunch with the CFO or some other executive and decide to buy a company, or move some money into and out of a personal account, etc.

Despite the lessons of the 2008 financial crisis, there has been no attempt to institute stronger governance to the financial system. The unspoken way of thinking -- which is really what is embedded in Wylde's comments to Schneiderman -- is: Our financial system is now too weak for stronger governance. That will be more time and money. That takes away from our margins, which are already so much less than they were when we were running 40:1 leverage.

Empty Chairs

At what point does someone say there need to be a parent around here to actually do some parenting with these banker kids and teenagers that are running around doing whatever they want?

And the New York Fed should be ground zero for governance for Wall Street. Instead, it's in cahoots with Wall Street.

Let's examine again the governance structure for the New York Fed.

There are nine board seats. Three of those seats are selected by banks (the industry that is being governed). Currently, those three are Jamie Dimon of JP Morgan Chase (JPM), Richard Carrion of Banco Populaire, and Charles Wait of Adirondack Trust.

Then there are three seats selected by the Board of Governors of the NY Fed to represent the public. These three include Wylde (who, by her comments, has shown herself to be an advocate of the banks and not the public), Lee Bollinger who is the president of Columbia University and Emily Rafferty who is the president of the Metropolitan Museum of Art.

Then there are three seats selected by the banks to represent the public. Did you read that? The banks get to pick the people who are supposed to govern them and represent not the banks but the public. Of the three seats, only one of these is filled -- by Jim Tisch of Loews Corporation, who I do have the highest respect for and think would represent the public's interests.

Who are the other two? They are vacant seats. Odd. Why don't they fill them?

Even odder, these seats have been vacant since 2008. Why does it take over three years to find people worthy enough to fill this role? Is there no one in New York City -- let alone the country -- erudite enough to fill this role? It would seem you do not even have to be a financial expert to be qualified since Ms. Rafferty of the Met serves on this board.

The New York Fed should be absolutely be held accountable for why they haven't filled these two board seats.

All In Favor

As it stands, with those vacant board seats, and assuming Tisch is on the side of the public and Wylde is on the side of the banks, you have a board that is four in favor of the bankers and four in favor of the public.

It is jaw-dropping to me that this kind of self-governance is allowed to continue in plain sight of the public and the ignorant business media pays no attention.

The New York Federal Reserve needs to be completely revamped. In my view, it should be made up of people entirely not beholden to banks. Their job should be to ensure the whole financial system on Wall Street is strong. If it pisses off the bankers that they can't run 40:1 leverage and pretend they're a hedge fund, tough.

If we had that kind of strong governance of Wall Street, we never would have traveled down this path that has led us to such a dismal economy in the first place.

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