A secret agreement that was enacted five years ago at the Federal Reserve has
just come to light. Known as the ‘Triangle Document,’ it purports to take
away regulatory power from the New York Fed branch – long known as the most
important outpost for the private quasi-government institution – and put it
in the hands of the Fed’s Board of Governors in Washington, D.C.
Until 2010, when the document was produced, the big banks essentially
enjoyed self-regulation, with significant power over the board.
Class A and Class B NY Fed board members are elected directly by member
banks, with Class C members in turn elected by the board (not much different,
really). JPMorgan Chase CEO Jamie Dimon – intricately involved in the
post-2008 bailout controversy – was the Class A director for the New York Fed board for six years
until his term expired in 2013.
For Big Banks and the Federal Reserve, it was a sweetheart
fox-guarding-the-henhouse arrangement that the public was never meant to
fully understand.
The Wall Street Journal’s Jon Hilsenrath broke the story:
The Federal Reserve Bank of New York, once the most feared banking
regulator on Wall Street, has lost power in a behind-the-scenes
reorganization at the nation’s central bank.
The Fed’s center of regulatory authority is now a little-known committee
run by Fed governor Daniel Tarullo , which is calling the shots in oversight
of banking titans such as Goldman Sachs Group Inc. and Citigroup Inc.
The new structure was enshrined in a previously undisclosed paper written
in 2010 known as the Triangle Document. Under the new system, Washington is
at the center of bank supervision, exercising control over the Fed’s 12
reserve banks, much as the State Department exerts control over embassies….
The lengthy WSJ article details a rather dramatic power struggle between
Wall Street’s top banking interests and Washington bureaucrats for control
over the institution that has taken control of the world.
During discussions the same year over what became the Triangle Document,
New York Fed bank examiners, led by supervisor William Rutledge, fought for
more representation on committees but lost, according to people who took
part. Mr. Rutledge, now at Promontory Financial Group, which advises firms on
dealing with regulators, said he supported the reorganization…
Nine of the Federal Reserve Board’s members are on the 16-person committee;
the New York Fed has three representatives, and they answer to Washington.
Mr. Dudley isn’t on it.
“This reserve bank doesn’t breathe any more without asking Washington if
it can inhale or exhale,” said one person prominent in the banking community.
The move, in theory, is one towards greater accountability towards the
public, as the Fed’s Board of Governors in Washington are federal employees
and subject to FOIA requests and greater scrutiny.
However, those gains are negated by the fact that the public didn’t even
find out about this reorganization – set in 2010 – until five years later.
Nevertheless, the Triangle document reorients power Washington, likely a
good thing for those who’ve been considered about the power granted the New
York Fed, who have long established cozy ties with Wall Street.
This is partially a result of the Dodd-Frank Act and the creation of the
Financial Stability Oversight Council.
As Naked Capitalism wrote:
This is a major win for Fed governor Dan Tarullo, who has emerged as one
of the toughest critics of big financial firms at the Fed in the wake of the
crisis. It is also a loss for the banks, since the New York Fed is widely
recognized as close to Wall Street. Moreover, the Board of Governors is more
accountable to citizens (its governors are Federal employees, the Board of
Governors is subject to FOIA,
And while there is some good news in moving the power center directly away
from Wall Street, it is obviously enough that Washington, D.C. hasn’t been
much better for the interests of the people.
All in all, the significance of this move may be overstated – as it is now
being made public – at a time when the Federal Reserve is trying to appear
more accountable and transparent to the public, while also maintaining the
appearance that life could not go on without its significant interventions.
Via Naked Capitalism:
Thus while this is generally a step in the right direction, the open
question is whether these steps are adequate. As one can see from its
monetary policy, which has worked out swell for the top 1%, the central bank
is far too tied into orthodox, meaning elite, views of what its priorities
should be. The Fed, for instance, appears to have no concern about the fact
that the economy is overfinancialized and reducing the size and profitability
of that sector should be a high priority. However, that point of view is
anathema to the Board of Governors’ general counsel Scott Alvarez, who is
unapologetic about how the deregulation over which he presided produced the
financial crisis and continues to exercise outsized influence over regulatory
policy.
As we’ve regularly argued, large banks get so much support from the state
that they cannot properly be considered to be private entities. They now
represent the worst form of socialism for the rich. They should be regulated
like utilities. Having utility-like profits and pay would mean that real
economy rather than casino economy jobs would look more attractive to
ambitious, highly-educated candidates.
Thus the Board of Governors move, while salutary, is likely to
turn out to be what the Japanese call “a height competition among peanuts,”
where the changes look significant to insiders but are recognized as trivial
to more objective observers.
Too little, too late is definitely a fair criticism. Will these regulatory
changes amount to any significant reform?
