'Three More Governance Questions for the Fed'

Simon Johnson continues his push against conflicts of interest within the Federal Reserve system:

Three More Governance Questions for the Fed, by Simon Johnson, Commentary, NY Times: Over the last several weeks on this blog, I have expressed ... concerns about governance arrangements at the Federal Reserve Bank of New York. I have made the specific case for Jamie Dimon, the chief executive of JPMorgan Chase, to step down from the New York Fed's board because of the large, unexpected losses in his bank's London proprietary trading operation - and the fact that these activities and their disclosure are now under investigation by the Fed. ...

In addition,... I have three substantive governance concerns for the New York Fed... First and most important, why didn't Mr. Dimon step down from the board of the New York Fed in March 2008, when JPMorgan Chase bought Bear Stearns with financial support provided, in part, by the Fed? ...

The authorities worked closely with JPMorgan Chase... JPMorgan's downside risk ... was limited. ... The precise terms of this arrangement were, appropriately, subject to detailed negotiation... How was it appropriate for Mr. Dimon to remain on the board of the New York Fed while this negotiation was going on? ...

Second, I would like to raise a question about Stephen Friedman, who was a Class C director of the New York Fed - and chairman during the intense financial crisis period, from January 2008 through early 2009. ...

According to the rules established by the Federal Reserve Board,... [there is a] fairly comprehensive ban on holding financial stock... But Mr. Friedman at that time was and still is a senior executive at Stone Point Capital, where ... he is involved in the fund's investment decisions. ... How was Mr. Friedman allowed to own these shares while being a Class C director? ...

Mr. Friedman bought Goldman Sachs stock after the company was effectively rescued by the Federal Reserve... I don't understand how a Class C director could have thought it was acceptable to buy any financial services company stock. ...

Third, I have a further question about the role of Lee C. Bollinger, the president of Columbia University, who is a Class C director and chairman of the Federal Reserve Bank of New York. ...

According to the Federal Reserve Act (Section 4.20): the chairman of a Federal Reserve Bank "shall be a person of tested banking experience." Mr. Bollinger ... does not have banking experience. ... Please explain to me how having Mr. Bollinger as chairman of the New York Fed is consistent with the Federal Reserve Act.

Taken together, these three questions raise a much bigger issue. If the intent and letter of the Federal Reserve Act are being followed in some ways and not in others - without proper notification to Congress or written rules available to the public explaining exemptions and exceptions - how exactly does this help maintain the legitimacy of the Federal Reserve System?