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GAO audit finds Federal Reserve bank boards lack transparency

By David Ariosto, CNN
updated 1:47 AM EDT, Thu October 20, 2011
STORY HIGHLIGHTS
  • A government audit shows apparent conflicts of interest on Federal Reserve banks boards
  • The banks should more "clearly document the roles" of directors, the report says
  • The report also criticizes the boards' lack of diversity

NEW YORK (CNN) -- The Federal Reserve banks need to better prevent conflicts of interest, according to a new government report that highlights transparency issues with financial executives serving on the banks' boards.

All 12 reserve banks should more "clearly document the roles and responsibilities of the (board) directors," according to a Government Accountability Office (GAO) audit released Wednesday.

The report focuses on scenarios in which executives pose apparent conflicts of interest by serving on boards that regulate financial houses where they also have business relationships.

An example, it notes, occurred when then-chairman of the New York Fed's board of directors Stephen Friedman owned shares in the investment firm Goldman Sachs, but in September 2008 provided it and other banks billions of dollars in federal funding in response to the unfolding financial crisis.

Friedman was granted a waiver by the Federal Reserve Board in January 2009, the report said. But the board was unaware that he had purchased additional shares in Goldman Sachs through an automatic stock purchase program.

The former chairman, who resigned in May 2009, could not be immediately reached for comment.

The GAO, meanwhile, said that "without more public disclosure of governance arrangements, such as board of director bylaws and director eligibility and ethics policies, there may be continued concerns about Reserve Bank governance and the integrity of the Federal Reserve System."

It did not identify actual conflicts of interest. However, it indicated the appearance of a conflict could cast broader concerns about the health of the overall reserve bank system.

The GAO is the investigative arm of Congress charged with examining matters relating to the receipt and payment of public funds.

Sen. Bernard Sanders, a Vermont Independent, said the agency's findings point to "exactly the kind of outrageous behavior by the big banks and Wall Street that is infuriating so many Americans."

"The most powerful entity in the United States is riddled with conflicts of interest," he said in a written statement.

Despite government regulatory efforts, Wednesday's audit says directors with affiliations and business relationships with banks "continue to pose reputational risks to the Federal Reserve System."

The report also called for reserve boards to boost diversity levels by broadening their candidate pool.

"Specifically, in 2010 Reserve Bank directors included 78 white men, 15 white women, 12 minority men, and 3 minority women," it noted.

The Federal Reserve Board said in a response included in the report that the recommendations "all have merit" and it "will work to implement them."

The audit was conducted as a result of a mandate by the Dodd-Frank Wall Street Reform and Consumer Protection Act, an 848-page bill meant to root out causes of the 2008 financial crisis.

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