The political heat surrounding Stephen Friedman, the former chairman of the New York Federal Reserve Bank and Goldman Sachs director, is showing no signs of easing.
Over the weekend, the House oversight committee, led by Edolphus Towns, said it had reviewed internal Fed emails revealing “misgivings” within the US central bank that were ultimately “overruled” about letting Mr Friedman own Goldman shares while serving on the NY Fed board.
William C Dudley, president of the NY Federal Reserve, today spoke at length about the dangers of allowing a financial institution become “too-big-to-fail.”
Though he said there is “no one silver bullet” to prevent financial crisis (and, indeed, his speech highlighted the importance of effective macroprudential supervision and increasing the robustness of the financial system), he said that it was “critical that we ensure that no firm is too big to fail.”
The moral hazards with giant institutions were two-fold, he said. First, too-big-to-fail institutions would be able to get cheaper credit, since they’d effectively have an implicit government guarantee. Second, institutions would have an incentive to become large, simply so they could get the government backstop, reguardless of their financial health.
Notably, though, his solutions to the too-big-to-fail problem did not mention actually limiting firms’ size.
It’s been a rough day for “TFG75″ – the email name for Tim Geithner. At least, it’s been a rough day according to intrade, which is giving Treasury secretary a 40 per cent chance of losing his job by the end of June, after a day of being grilled by the House oversight committee.
For a wrap of today’s hearings, see:
Ok, they’re not secret any more. But the New York Fed did, early on, put some effort into not disclosing the names of AIG counterparties. And so, in the run-up to Geithner’s testimony tomorrow, Darrell Issa, the Republican ranking member of the House oversight committee, has released the results of his investigation.
The report reads more like a Washington political thriller than a Congressional document. Just look at its title: “Public disclosure as a last resort: How the Federal Reserve fought to cover up the details of the AIG counterparties bailout from the American people”.
The “tremendous expansion” of the NY Fed’s balance sheet, the bank has created a new “Special Investments Management Group,” the bank said today.
The new group will separate out the management of new investments from its financial risk management.
Willam C. Dudley, president of the NY Fed, today called for a systematic financial risk oversight framework, in which the Fed would play a key role.
“The financial system is simply too complex for siloed regulators to see the entire field of play, the prevent the movements of financial activity to areas where there are regulatory gaps, and, when there are difficulties to communicate and coordinate all responses in an timely and effective manner…I believe that the Federal Reserve has an essential role to play.”
And what of earlier Fed failures?
AIG is back on the House’s radar.
Earlier this week, Edolphus Towns, the Chairman of the House oversight committee, said he would subpoena the NY Fed for documents related to AIG counterparty payments and today he said that Tim Geithner had confirmed that he would speak before the committee later this month.
And separately, in a tersely worded response to Spencer Bachus, the Republican Ranking Member on the House Financial Services Committee, Barney Frank, the committee’s Democratic Chairman, said the Fed’s role in the AIG bail-out would be back on his committee’s agenda.
It is not, of course, the idea of looking into Chairman Ben Bernanke’s role that has Mr Frank up in arms. Mr Bernanke was, after all, a Republican appointee, and the decision to bail-out AIG and its counterparties came while Mr Bush was still president. It’s that Mr Bachus is continuing to focus on Tim Geithner, then head of the NY Fed and now Treasury Secretary.
But enough background, here’s the statement:
Edolphus Towns, the Chairman of the House oversight committee, today said he would subpoena the Federal Reserve Bank of New York for documents related to AIG counterparty payments.
“To help the Committee’s investigation of payments made by AIG to its counterparties, I am issuing a subpoena today to the Federal Reserve Bank of New York. This subpoena will provide the Committee with documents that will shed light on how and why taxpayer dollars were used for a backdoor bailout.”
Federal Reserve Bank of New York announced today that it had published the rules it had been using with primary dealers in an effort to ensure greater transparency. Primary dealers, the groups through which the Federal Reserve funds are lent to banks, garnered attention after they, too, needed loans from the Fed to stop them from “dump[ing] assets on the market in fire sales” during the financial crisis. Lending directly to primary dealers, a move only permitted in “unusual and exigent circumstances” since lending to the highly-leveraged groups could encourage excessive risk taking.
The NY Fed emphasised that the new rules “do not represent new standards expected of primary dealers” but rather a “formalisation of the existing practice.”
The newly published rules include: