Goldman Sachs Hires New York Fed's Lubke, Pointman on Derivatives Reform
Theo Lubke, who headed the Federal Reserve Bank of New York’s efforts to reform the private derivatives market, joined Goldman Sachs Group Inc. to help Wall Street’s most profitable firm navigate the looming overhaul of financial regulations.
Lubke, 44, started this month as chief regulatory reform officer in Goldman Sachs’ securities division, according to a memo obtained by Bloomberg News. The newly-created role will allow Lubke to “work closely with divisional and firm-wide leadership to implement regulatory reform legislation,” the memo said.
Goldman Sachs is hiring Lubke five months after Congress mandated the regulation of the $583 trillion over-the-counter derivatives market, which complicated efforts to resolve the financial crisis. The reforms threaten to cut profits at dealers because they will make swaps prices known to the public. Lubke’s new firm employs a former New York Fed president and has an ex- Fed board chairman as a director. The current president of the New York Fed, William Dudley, also worked there.
“It’s a pattern,” said Charles Geisst, a finance professor at Manhattan College in Riverdale, New York, who has written about Wall Street’s history. “It’s troublesome stuff and there needs to be some regulation so people don’t do it and undermine public policy.”
Michael DuVally, a spokesman for Goldman Sachs who confirmed the contents of the memo, declined to comment.
“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 who leave 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.
Lubke was reassigned to an administrative role at the Fed in September so he could begin looking for a job outside the bank, a person familiar with the matter said at the time.
In 2007, Timothy Geithner, then president of the New York Fed, appointed Lubke to his former role, as the central bank pushed for changes in the credit-default swap market. Geithner, who’s now Treasury Secretary, started those efforts in 2005 when he 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.
Wall Street Criticized
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 clearinghouses 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.
Lubke is the latest regulator to be hired by Wall Street’s most profitable securities firm. Bankers who worked at Goldman Sachs have also become regulators.
“That street goes both ways,” said Geisst, author of books including “The Last Partnerships: Inside the Great Wall Street Money Dynasties” (McGraw-Hill, 2001). “They go from Goldman to the Fed and they go from the Fed to Goldman, and that’s the important part of it.”
Other firms also have ties to the central bank and the government. Last week, Citigroup Inc., the biggest bailout recipient among U.S. banks during the financial crisis, hired former White House Budget Director Peter Orszag to be vice chairman of its investment-banking division.
Dudley, a former partner at Goldman Sachs and its chief U.S. economist for a decade, joined the New York Fed in 2007 and then succeeded Geithner as the central bank’s president in 2009. E. Gerald Corrigan, who headed the New York Fed from 1985 to 1993, joined Goldman Sachs in 1994, where he went on to be co- chair of its global risk-management committee and co-chair of global compliance and control.
Corrigan, 69, was appointed by the bank to help oversee a business standards committee in May, a month after the U.S. Securities and Exchange Commission sued the firm for fraud over how it marketed a collateralized debt obligation. Goldman Sachs agreed to pay $550 million in July to settle the suit.
Stephen Friedman, a former chairman of Goldman Sachs’ board, quit as chairman of the New York Fed’s board of directors in May 2009 to avoid the appearance of a conflict of interest over his ties to the investment bank. Friedman, who served as Goldman Sachs’s co-chairman with Robert Rubin from 1990 to 1992 before Rubin became Treasury Secretary, remains a Goldman Sachs board member.
Geithner, who was named Treasury Secretary in January 2009, hired former Goldman Sachs lobbyist Mark Patterson as his chief of staff. Patterson recused himself for two years from any issues that relate specifically to the bank, which he left in April 2008.
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