The Federal Reserve Bank of New York shaped Washington's response to the financial crisis late last year, which buoyed Goldman Sachs Group Inc. and other Wall Street firms. Goldman received speedy approval to become a bank holding company in September and a $10 billion capital injection soon after.
During that time, the New York Fed's chairman, Stephen Friedman, sat on Goldman's board and had a large holding in Goldman stock, which because of Goldman's new status as a bank holding company was a violation of Federal Reserve policy.
The New York Fed asked for a waiver, which, after about 2½ months, the Fed granted. While it was weighing the request, Mr. Friedman bought 37,300 more Goldman shares in December. They've since risen $1.7 million in value...
Jerry Jordan, a former president of the Fed bank in Cleveland, says Mr. Friedman should have stepped down once Goldman became a bank holding company in September and thus fell under the Fed policy barring stock ownership by certain directors of Fed banks. "Any kind of financial transaction at all by any of the directors is always a problem," Mr. Jordan said. "He should have resigned."
While the WSJ piece points to conflicts for Friedman after Goldman became a bank holding company, the conflicts are much deeper than that. As chairman of the New York Fed, Friedman has all kinds of inside access to Fed monetary thinking, interest rate policy thinking and foreign exchange policy thinking. All areas where inside knowledge would be extremely valuable to Goldman traders.
In short, power centers created by government regulation--and the Fed is certainly a power center--attract those who can benefit from some type of influence over the power center.
There are no regulations that can change the attempt to seek influence over power. There is only one solution end the power source, in this case, end the Fed.