The Federal Reserve is crafting a policy aimed at preventing conflicts of interest

TO BE NOTED: From Bloomberg:

"Fed Seeking to Prevent Conflicts of Interest at Regional Banks

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By Vivien Lou Chen

May 9 (Bloomberg) -- The Federal Reserve is crafting a policy aimed at preventing conflicts of interest when some directors of its 12 regional banks own shares of bank holding companies supervised by the Fed.

Such investments came under scrutiny this week after revelations that the former New York Fed chairman, Stephen Friedman, as well as Minneapolis Fed Deputy Chairman John Marvin, owned stock in bank holding companies. Friedman, a Goldman Sachs Group Inc. board member, resigned May 7 from the New York Fed to avoid the appearance of a conflict.

The Fed’s “board is developing a policy to address these types of situations in the future,” David Skidmore, the central bank’s spokesman, said in an e-mail yesterday. He didn’t elaborate.

U.S. lawmakers, concerned about the record expansion of the Fed’s balance sheet to more than $2 trillion as it battles the recession, have called for greater scrutiny of the regional Fed banks, including the appointment of their presidents.

The regional banks make up the Federal Reserve system along with the Board of Governors in Washington. While they have a voice in setting central bank policy, the regional banks operate as public-private entities with nine-member boards of directors who aren’t confirmed by legislators.

Friedman, who runs the investment firm Stone Point Capital LLC in New York, was chosen for a three-year term as a Class C director in 2008, one of three directors appointed by the Fed’s Board of Governors to represent the public.

Friedman, 71, was granted a waiver to keep serving on the New York Fed board after Goldman Sachs became a bank holding company in September. He remained a Goldman Sachs director and bought company shares in December and January.

Web Site Letter

Last month, he planned to depart at the end of the year. He announced May 7 he would resign immediately, explaining in a letter posted on the New York Fed’s Web site that questions about his Goldman Sachs connections were a “distraction.”

“Although I have been in compliance with the rules, my public service-motivated continuation on the Reserve Bank Board is being mischaracterized as improper,” he said.

Thomas Baxter, general counsel of the New York Fed, said in a statement on May 7 that Friedman’s purchases of Goldman Sachs shares in December and January “did not violate any Federal Reserve statute, rule or policy.”

In addition to Class C directors, each of the regional banks has three Class A directors and three Class B directors, all six of whom are elected by member banks. Those in Class A represent the banks, while those in Class B represent the public at large.

Friedman isn’t the only Class C regional Fed board member to have owned shares in a bank.

Minneapolis Fed

The Minneapolis Fed’s Marvin was granted a waiver in January allowing him to serve while he and his family owned shares of Goldman Sachs, Morgan Stanley and Merrill Lynch & Co., now part of Bank of America Corp., Minneapolis Fed spokeswoman Patti Lorenzen said.

Marvin is chairman and chief executive of Marvin Windows and Doors in Warroad, Minneapolis. He and his family owned shares of Goldman Sachs, Merrill Lynch and Morgan Stanley valued at “well under $100,000,” she said. Ownership of the shares “was in compliance with Federal Reserve rules” when he joined the Minneapolis Fed board in 2006, Lorenzen said.

The Minneapolis Fed applied for a waiver on his behalf in November 2008, and the request was granted by the Fed’s governors in January, she said in an e-mail yesterday.

No More Purchases

“No additional shares in these companies have been purchased since they became bank holding companies,” Lorenzen said.

Berit Griffin, a spokeswoman for Marvin Windows, didn’t immediately reply to messages left at her office and e-mail address after business hours.

Lawmakers are taking a closer look at how regional Fed presidents are chosen.

The Senate passed a nonbinding budget amendment by a 96-2 vote last month that in part called for “an evaluation of the appropriate number and the associated costs” of the regional Fed banks. The measure was proposed by Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, and Senator Richard Shelby of Alabama, the committee’s senior Republican.

Representative Barney Frank of Massachusetts, chairman of the House Financial Services Committee, said last year that he planned to probe how the district Fed chiefs are appointed and their role in setting interest rates.

The Fed regulates and supervises bank holding companies, while its regional banks conduct bank examinations.

To contact the reporter on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net"