New York Fed Swaps Reformer Lubke Joins Goldman Sachs

Theo Lubke, who served for 15 years at the Federal Reserve Bank of New York and headed its efforts to reform the private derivatives market, joined Goldman Sachs Group Inc., according to a memo obtained by Bloomberg News.

Lubke, 44, started this month as chief regulatory reform officer in Goldman Sachs’ securities division, the memo said. The newly-created role will allow Lubke to “work closely with divisional and firm-wide leadership to implement regulatory reform legislation,” according to the memo. Michael DuVally, a spokesman for Goldman Sachs in New York, confirmed the document.

The most profitable securities firm in Wall Street history is hiring Lubke five months after Congress mandated the regulation of the $583 trillion over-the-counter derivatives market after swaps complicated efforts to resolve the financial crisis. The reforms threaten to cut the profit at dealers such as Goldman Sachs because they will make swaps prices known to the public.

In 2007, Lubke was appointed to his former role by Timothy Geithner, now Treasury Secretary, who was then president of the New York Fed. The central bank has pushed for changes in the credit-default swap market since 2005, when Geithner became concerned that an explosion of trading was threatening the ability of banks and regulators to manage and monitor risks that posed a threat to the financial system.

He was reassigned as a senior vice president at the New York Fed in September to begin looking for a job outside the bank, a person familiar with the matter said at the time.

Fed Statement

“The Federal Reserve and New York Fed have strict conflict of interest policies for its staff, including departing employees,” Jeffrey Smith, a spokesman for the New York Fed, said in an e-mailed statement. “In this instance, as in all cases, these policies were strictly followed.”

Senior Fed officials are prohibited for six months from attending any meetings with the central bank or from any contact with it on matters related to the area in which the official worked, according to a person familiar with the matter.

Last year, Lubke criticized Wall Street’s control over the OTC derivatives market, where credit-default, interest-rate and other swaps are traded privately between banks and their customers.

“It is simply unacceptable in today’s environment that the design and structure of the OTC derivatives market can be controlled by a handful of large dealers,” Lubke said at an International Swaps and Derivatives Association conference in Beijing in April 2009.

The Dodd-Frank Act, which became law in July, requires most swaps to be guaranteed by clearinghouse and traded on exchanges or similar systems. Public prices may lead to compressed differences between what buyers and sellers want to pay for the contracts, known as the bid-offer spread, Howard Chen, a Credit Suisse Group AG analyst in New York, wrote in a Dec. 7 note to clients.

That could be combated by increases in the rate of swaps trading and greater market efficiency that come from the new regulations, Chen said in the note.

To contact the reporters on this story: Matthew Leising in New York at mleising@bloomberg.net; Shannon D. Harrington in New York at sharrington6@bloomberg.net.

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net.

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