The Crisis of Conflicts at the New York Fed: Circling the Wagons to Set Up Ex-Goldmanite William Dudley As President

How do insiders take care of one another?

EPJ's Bob English is doing a masterful job working through New York Fed board of directors minutes just released. In the report below, from English, we learn the critical previously undisclosed fact that GE Chairman Jeffrey Immelt voted to make William Dudley president of FRBNY and grant him conflicts waivers for his investments in GE.  Meanwhile, GE was receiving peak assistance from the Fed during this time.-RW.

Friday, the New York Fed, "in its ongoing efforts to increase transparency," announced it would release the minutes of its Board of Directors meetings with a six month lag.  Its website was concurrently updated to release a subset of its historical Board minutes (notably excluding those of the Audit and Operational Risk Committee, or AORC) from January 2007 through June 2012.  Despite the AORC omissions and heavy redaction of Directors' opinions, including those of Jamie Dimon and other heads of so-called TBTF institutions who serve on the Board, they nevertheless add color and detail to many stories chronicled here at EPJ.

This multi-part series will focus on questionable waivers granted by the Board to activities of the New York Fed Reserve Bank itself, as well as its top officials, including current President, William Dudley and former Chairman, Stephen Friedman--both former Goldman Sachs executives.

Ex-Goldmanite Dudley's Rise

During the height of the financial panic of 2008, Timothy Geithner served as the President and CEO of the New York Fed, and was its permanent representative to the Federal Open Market Committee (FOMC), which makes official Fed monetary policy.

After US President-elect Obama indicated he would nominate Geithner for Treasury Secretary, a search ensued for his replacement.  The Minutes of a November 24, 2008 New York Fed Board meeting revealed that Director and Board Chairman, Stephen Friedman, would lead a special search committee to find a new president.  (Friedman would later himself resign from the New York Fed in June, 2009 after a scandal erupted involving his purchases of Goldman Sachs stock both before and after it became a Fed-regulated bank holding company in 2008.)

Minutes of a January 10, 2009 meeting revealed the search continued into the new year:

The Directors first interviewed a number of potential candidates for the position of President and Chief Executive Officer of the Federal Reserve Bank of New York. Mr. Geithner then entered the meeting and a discussion ensued regarding the candidates. Mr. Geithner and Mr. Baxter [New York Fed General Counsel] then exited the meeting. The discussion continued, at the end of which, the Directors agreed to defer their decision on this matter and instead to conduct additional interviews of the potential candidates.

Five days later, the Executive Committee of the Board met to appoint on an interim basis Christine M. Cumming, First Vice President, as representative to the FOMC.  Eight days later, on January 23, 2009, another meeting of the Executive Committee of the Board revealed a permanent decision had finally been made: it would be William Dudley who, at the time was Vice President of the Markets Group at the New York Fed, which is responsible for overseeing all Fed open market operations and many emergency lending programs.  However, the vote was not without some contortions to accommodate extant conflicts of interest regarding Dudley's ownership of certain mysterious "financial interests," (emphasis ours):

In the absence of a quorum of the members of the Board of Directors, the Directors present unanimously requested that the Executive Committee meet pursuant to Section 1 of Article II of the Bylaws.

Mr. Baxter, referring to a memorandum (#   ) dated January 22, 2009 regarding William C. Dudley, presented to the Directors for their approval: (a) a temporary waiver of a potential conflict of interest relating to certain of Mr. Dudley’s financial interests (b) a resolution appointing Mr. Dudley as the Bank’s representative on the FOMC. Mr. Baxter explained that Mr. Dudley currently retained certain financial interests that could present a conflict of interest with Mr. Dudley’s duties as president of the Bank, and that Mr. Dudley had agreed to expeditiously divest himself of these interests. Mr. Baxter opined that the Directors should consider issuing a waiver so as to allow Mr. Dudley to continue to serve as president until the divestiture was completed. A brief discussion ensued, in which the Directors expressed support for the proposal to grant Mr. Dudley a temporary  waiver with the understanding that Mr. Dudley would move as quickly as possible to divest himself of these otherwise prohibited financial interests.  

Whereupon, it was duly and unanimously 

VOTED to approve the following resolutions: 

“VOTED, that the statutory waivers for William C. Dudley, in the form attached hereto, are hereby APPROVED.”

“RESOLVED, that this Board does hereby vote to appoint William C. Dudley, as the representative of this Federal Reserve Bank on the Federal Open Market Committee (“FOMC”), effective as of the date Mr. Dudley assumes the position of President of this Federal Reserve Bank; and does hereby vote to appoint Christine M. Cumming, to serve as an alternate on the Federal Open Market Committee in the absence of the Bank’s representative on the FOMC, effective immediately. These appointments shall expire on the day immediately before the date of the first regularly scheduled meeting of the FOMC in 2010.” 

Only years later would we learn the nature of these financial interests.

The issue of a waiver of conflicts would surface again on April 30, 2009, this time in front of the full Board, which cryptically referred to a document titled only "William C. Dudley":

Mr. Baxter, referring to a memorandum (#   ) dated April 27, 2009 entitled “William C. Dudley” requested the Directors to approve a proposed waiver of potential conflict of interest presented by Williams C. Dudley’s service as president of the Federal Reserve Bank of New York and a member of the Federal Open Market Committee. 

Whereupon, after discussion, it was duly and unanimously, voted to adopt the following resolution: 

“VOTED, that the statutory waiver for William C. Dudley, in the form attached hereto, is hereby APPROVED.”

We are left to wonder whether this was the result of new conflicts or a formal gloss-over of previous conflicts.

The Mini-Fed Audit

As consolation for a full Ron Paul audit of the Fed, the last-minute Sanders Amendment to Dodd-Frank authorized the Government Accountability Office (GAO) to conduct a one-time audit of the Fed's emergency loan programs and other assistance authorized by the Fed for the period December 1, 2007 through July 21, 2010.  As most of the emergency programs were facilitated by and conducted through the New York Fed, it received heightened attention.  Among the areas of review were "management of conflicts of interest," wherein the GAO found many deficiencies.

The GAO's first full report was released in July, 2011 and detailed how a key New York Fed official was granted a waiver in 2008 to retain shares of American International Group Inc. (AIG) and General Electric Company (GE), both of which were receiving or were about to receive emergency assistance from the Fed.  After discussion with the GAO, Senator Sanders' office revealed to the press this official was, in fact, William Dudley.

On July 22, 2011, Bloomberg published statements from an email received from New York Fed spokesman, Jack Gutt: "Dudley's holdings predated his employment at the New York Fed, and he sold his shares after becoming president in January 2009, which was about four months after AIG's rescue."  Bloomberg continued, "he received a waiver in part because 'had he sold these shares immediately after the interventions it would have the appearance of a conflict,' Gutt said."

The obvious question is, why was it incumbent upon Dudley to divest himself of AIG and GE shares as soon as he became President, and not prior when he was in his prior supervisory position to make decisions about emergency assistance to AIG and GE?  The GAO would weigh in:

Our review of several recommendations for waivers granted from September 19, 2008, through March 31, 2010, indicated that FRBNY employees who requested waivers were generally allowed to continue to retain their related personal financial investments. Most of the financial interests were in institutions receiving emergency assistance, including AIG, Bank of America, Citigroup, General Electric Company (GE), and JPMC. For example, on September 19, 2008—3 days after the Federal Reserve Board authorized FRBNY to assist AIG—the then-FRBNY President [Geithner] granted, under authority delegated by the FRBNY Board of Directors, a waiver to a senior management official [Dudley] with financial interests in AIG and GE who was involved in decision making related to these two companies.90 

Similar to criteria noted previously, the waiver recommendation from FRBNY’s Chief Ethics Officer cited reasons based on (1) the criticality of the official’s responsibilities, (2) the combined value of the official’s interests comprising less than 5 percent of the official’s total financial holdings, and (3) the de minimis [$15,000 or less] nature of the official’s investment in AIG. Specifically, the waiver recommendation from FRBNY’s Chief Ethics Officer noted that the official’s participation in decisions related to AIG and GE was critical to the official’s senior-level responsibilities. In addition, in this recommendation, the Chief Ethics Officer expressed concern that the official’s divestiture of the holdings could violate securities laws because of the official’s access to material, nonpublic information. Furthermore, the waiver recommendation noted that should FRBNY’s actions impact the equity of either company, divestiture by the official could have created the appearance of a conflict.  

The waiver recommendation further noted that while this official would be permitted to provide advice on decisions about assistance to AIG and GE, FRBNY’s president would make final decisions on these issues. We did not assess the appropriateness of FRBNY’s decisions to grant waivers and recognize that these decisions are case-specific and necessarily require subjective judgments. The challenge of applying such judgments is highlighted by guidance from the Office of Government Ethics, which notes that while a waiver analysis usually requires the consideration of several competing factors, appearance concerns will always play an important role in the decision whether to grant a waiver.

The summary is presented as a damned-if-they-did, damned-if-they-didn't situation: Dudley's participation in AIG and GE-related decisions was critical.  Yet, if he sold his interests, conflicts appearances or securities law violations may have arisen.  Better to be second guessed in hindsight which, at the time, probably seemed unlikely (which itself begs the question of how many similar incidents occurred in the Fed's history prior to the GAO review period).

The principal deciding issue on whether to grant Dudley's waiver was the criticality of his responsibilities.  The mitigating factor was that he still had oversight from the New York Fed's president, who would make final decisions on AIG and GE issues.  Yet, from the aforementioned November 24, 2008 Board Minutes, Chairman Friedman noted that Geithner would only continue to serve as President for "at least the next several weeks."

Who's Running the Show at the New York Fed

It would be more than eight weeks later on January 23, 2009 that Dudley would be elected by the Board to serve as President and would be granted a full waiver from an opinion of General Counsel Baxter (provided Dudley would immediately commence the process of selling his AIG and GE shares).

Data obtained by Bloomberg through an FOIA request and subsequently analyzed by EconomicPolicyJournal.com reveals that peak lending to GE occurred during the week ending November 21, 2008, at $16.1 billion, and continued at this amount through the week ending January 25, 2009.  Prior to and after this period, Fed lending to GE was negligible.

Thus, Fed assistance to GE was nearly completely executed during the time in which Dudley had little to no oversight by the departing President Geithner, when such oversight was the principal mitigating factor for allowing Dudley's original waiver in the first place.

A chart of AIG assistance tells a similar story:

Which brings up the second major question: just who exactly approved Dudley's appointment at that January 23, 2009 Board Meeting when the Minutes indicated not even a quorum was president?

"Mr. Bollinger" would be Lee C. Bollinger, President of Columbia University.

"Mr. Dimon" would be Jamie Dimon, Chairman and CEO of JPMorgan Chase.

"Mr. Baxter" would be Thomas C. Baxter, General Counsel and author of the Dudley waiver.

"Mr. Held" would be Michael A. Held, Deputy General Counsel, who reported to Mr. Baxter.

"Mr. Friedman, Chair" would be Stephen Friedman, who led the search for Geithner's replacement and who would step down a few months later amid his own conflicts scandal.

Finally, "Mr. Immelt" would be Jeffrey R. Immelt, Chairman and CEO of GE.

Instead of the usual 13 or so members of the full Board, only six would decide the fate of Mr. Dudley and grant Baxter's waiver of Dudley's conflicts, including his holdings of AIG and GE shares.  Just why the Chairman and CEO of GE would be allowed to vote on a conflicts issue regarding the President-to-be's investment in GE itself is left as an exercise for the reader.  Regardless, this would appear to be the second major failure noted by EPJ of the GAO's mini-Fed audit, the first being questionable no-bid contracts assigned to BlackRock for Maiden Lane (see here and here).