Love him or hate him, Ron Paul, a Republican congressman from Texas and a candidate for the GOP nomination, deserves commendation for his determination to put the Federal Reserve Board under the national political microscope. Largely as a result of Paul’s persistence in the House and an amendment offered by Sen. Bernie Sanders, I-Vt., the General Accounting Office was directed in the Dodd-Frank financial reform bill to examine the extent to which conflicts of interest were involved in Fed decisions during the financial crisis of 2008. The results of the GAO examination were made public last week, and they make clear that there is indeed a great need for more transparency in the operations of the U.S. central bank. The most troublesome revelation in the GAO audit is the extent to which insiders benefited from their positions and access during the crisis. The GAO found 18 instances in which current and former members of the Fed affiliated with banks and other companies received emergency loans from the board, including General Electric, Goldman Sachs, Lehman Brothers, and JP Morgan Chase. In the case of General Electric, its CEO Jeffrey Immelt served on the New York Fed, which loaned his corporation $16 billion in emergency funding during the crisis. Those loans were made after the New York Fed consulted with General Electric officials concerning creation of a Commercial Paper Funding Facility, according to Sanders.
One of Goldman Sachs’ directors, Stephen Friedman, was chairman of the board of the New York Fed. Friedman also owned substantial stock in Goldman Sachs during the same period in 2008 when the New York Fed voted to allow Goldman to operate as a commercial bank as well as an investment bank. That approval meant Goldman got access to loans from the Fed at highly favorable rates. Fed ethics guidelines prohibit a Fed governor from owning stock in a firm being considered for commercial status, but Friedman received a waiver and continued buying Goldman stock.
