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When banking and investment wizards inadvertently blew up the financial system in 2008, the Federal Reserve Bank of New York required outside expertise on its triage team. And so it hired banking and investment wizards, including some who allegedly helped precipitate the devastating financial explosion, paying out $659.4 million across 103 contracts from 2008 through 2010. Among the hires were Goldman Sachs, Morgan Stanley, State Street and JPMorgan Chase -- all of which were recipients of the government's TARP, or Troubled Assets Relief Program funds. The 10 largest contracts awarded by the New York Fed represented 74% of the total amount. Eight of the largest contracts were awarded without competitive bidding.
Recipients of the 10 largest contracts were BlackRock (no bid); Morgan Stanley (no bid); Ernst & Young (no bid); Allianz's Pimco (no bid); law firm Davis Polk & Wardell (no bid); Wellington Management (no bid); State Street; JPMorgan (no bid); Goldman Sachs; and Morgan Stanley's EMC (no bid). Much of the contracted work was with American International Group, Bear Stearns, Citigroup and Bank of America; the no-bids were awarded to companies that were familiar with the innards of these troubled institutions. The New York Fed was lending the troubled institutions money and needed help to evaluate the value of the assets that they proffered as collateral.
The history of this cozy arrangement between the regulators and the regulated is outlined in a 266-page, July 2011 audit by the Government Accountability Office that came to light during an Oct. 4 hearing by the House Subcommittee on Domestic Monetary Policy and Technology, which is chaired by Texas Republican Rep. Ron Paul. The story is also contained in a companion 127-page GAO audit, released Oct. 19, attacking the Fed's inadequate safeguards against potential conflicts of interest among board members at its regional banks. Both reports are one-time audits required by the Dodd-Frank Wall Street reform law.
Though the GAO says all 12 Federal Reserve Banks should tighten up their policies regarding potential conflicts of interest, the watchdog uncovered no crimes. The audit spotlighted the fact that some New York Fed directors were consulted by management and staff there about the creation of emergency facilities back in 2008, but that the board members had no direct role in approving any programs. Even so, those consultations looked bad. For example GE's CEO, Jeff Immelt, a New York Fed director at the time, was asked for advice about assisting the commercial-paper market. At the time, General Electric was one of the country's largest issuers of commercial paper. The GAO identified 18 instances of this sort of thing.
By reading both audits head to footnote, I noticed things that apparently the GAO did not. Goldman Sachs and JPMorgan both got big contracts in 2008, when company officers were New York Fed directors. Without going into individual cases, the GAO makes a blanket statement that no directors had a say on any vendor contracts. Bully for that.
But from the outside looking in, the Fed looks sloppier than expected, no doubt owing to its insulation from oversight. A Dodd-Frank tweak, authorizing even broader GAO audits of the Federal Reserve System, might be the perfect pill.
Comments? E-mail: jim.mctague@barrons.com
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