The overlap between bankers and their regulator poses | REUTERS GAO warns of Fed conflicts

The Federal Reserve faces possible conflicts of interest by having financial and banking executives serving on its regional boards, according to a new report Wednesday by the Government Accountability Office that calls for greater transparency.

As illustrated by the emergency measures taken by the Fed between 2007 and 2009 to stabilize markets and save some banks from failing, the overlap between bankers and their regulator poses “reputational risk,” the report noted.

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The Fed system should address the issue by providing greater transparency about the actions taken by all of its 12 regional bank boards.

“Without more complete documentations of the directors’ roles and responsibilities with regard to the supervision and regulation functions, as well as increased public disclosure on governance practices to enhance accountability and transparency, questions about Reserve Bank governance remain,” the report said.

The regional banks generally recruit directors for their nine-member boards through a combination of personal networking and community outreach.

Vermont Sen. Bernie Sanders, responding to the report, said the practice essentially allows the banking industry to pick Fed directors, a practice he wants to stop with legislation to restructure the system.

“Clearly it is unacceptable for so few people to wield so much unchecked power,” Sanders said. “Not only do they run the banks, they run the institutions that regulate the banks.”

Drawing from the report, Sanders noted three instances involving the New York Fed that created the appearance of a conflict of interest.

In 2008, the New York Fed approved an application from Goldman Sachs to become a bank holding company, providing the firm with access to cheap Fed loans. The New York Fed board chairman at the time was Stephen Friedman, who also sat on Goldman’s board.

And Jamie Dimon, CEO of JP Morgan Chase, was also on the board when his bank received emergency loans, and separately an 18-month exemption from risk-based leverage and capital requirements as part of the deal to acquire the collapsing investment bank Bear Stearns.

While General Electric CEO Jeffrey Immelt also served on the New York Fed board, his company received $16 billion in financing under an emergency lending program.

GE spokesman Andrew Williams said the company paid $98 million in upfront fees to participate in the program and paid back the loan back on time in early 2009.

The GAO said it “did not find evidence that Reserve Bank boards of directors participated directly in making any decisions about authorizing, setting the terms of, or approving a borrower’s participation in the emergency programs.”