Fed Employees Serve Treasury Deepening Ties Forged in Crisis
The Federal Reserve Bank of New York employees who analyze American International Group Inc. (AIG)’s finances report to work each day at the New York Fed even though their supervisors are at the Treasury Department in Washington.
The analysts are among about 40 Fed staffers temporarily assigned to the Treasury in the past four years in an expanded flow of brainpower, according to records provided by the Fed in response to Freedom of Information Act requests. A range of junior and senior Fed employees had stays at Treasury offices including domestic finance, markets, international affairs and the Troubled Asset Relief Program.
The AIG arrangement is emblematic of how the ties between the central bank and the Treasury have persisted and deepened since they joined forces to combat the financial panic of 2008. The challenge for the Treasury is to avoid becoming too dependent on Fed help -- and for the Fed to avert the increasing perception, especially among Republicans, that it’s too cozy with a Democratic administration.
“The mingling of the staff seems to me not to be wise from the point of view of maintaining, quite strictly, the independence of the central bank from the Treasury,” said William Poole, who was president of the St. Louis Fed bank from 1998 to 2008 and served on Republican President Ronald Reagan’s Council of Economic Advisers.
The increased flow of staff reflects a Treasury Department trying to cope with a bigger workload and resorting to tapping expertise from institutions including the U.S. Securities and Exchange Commission, Department of Housing and Urban Development and the Fed. The central bank, with about 275 Ph.D. economists in Washington alone, is one of the government’s deepest sources of knowledge on the economy and financial markets.
“When you’re in a crisis situation like that you borrow the staff that you need, but it ought not to be a permanent arrangement,” said Poole, now a senior fellow with the Cato Institute in Washington. There hasn’t been a “rapid-enough return to a more normal state of affairs.”
The Fed has faced criticism from the public and Congress, especially Republicans, that it waded too far into fiscal policy by collaborating with the Treasury on bailouts of AIG, Bear Stearns Cos. and Citigroup Inc. In addition, after the central bank lowered its main interest rate almost to zero in 2008, it bought $2.3 trillion of Treasuries and government-backed housing debt aimed at lowering borrowing costs.
Some barbs have come from critics inside the central bank. Philadelphia Fed President Charles Plosser said in 2010 that Fed emergency actions “blurred the line between monetary policy and fiscal policy, thereby increasing the risk to the Fed’s independence.” Dallas Fed President Richard Fisher said last November that he was concerned asset purchases would reduce the “odds that fiscal discipline will be brought to bear.”
Most of the Republicans campaigning for the 2012 presidential nomination agree that they wouldn’t keep Ben S. Bernanke, appointed as Fed chairman by Republican President George W. Bush in 2006 and reappointed in 2010 by President Barack Obama, a Democrat. Texas Governor Rick Perry said in August that Bernanke, 57, would be treated “pretty ugly down in Texas” if he printed more money before the election.
Bloomberg News obtained the information on temporary assignments through open-records requests with the Fed’s Board of Governors and the New York Fed for names of employees who were detailed to other federal agencies since 2000. The Washington-based Board of Governors provided documents in response, while the New York Fed gave a list of names and departments on the condition Bloomberg News withdraw its formal request. The Treasury said it didn’t have records on outside employees detailed to the department.
‘Spirit of FOIA’
The New York Fed said in a letter to Bloomberg News that while the bank is “not subject to FOIA, it complies with the spirit of FOIA when responding to requests such as yours.”
The combined records, which aren’t complete or exhaustive, show few Fed employees detailed outside the central bank before 2008, compared with about 50 since then, most of them since Obama took office in January 2009. In addition to the Treasury, the destination for the majority of assignments, some staffers did stints in offices including the White House Council of Economic Advisers, Export-Import Bank and Financial Crisis Inquiry Commission.
The assignments, typically lasting about three months to a year, stem from stepped-up cooperation between the Fed and the Treasury on rescue efforts such as the $700 billion TARP and regulatory initiatives including the Dodd-Frank financial-law overhaul.
Increase in Assignments
David Skidmore, a Fed spokesman, said the increase in temporary assignments “is not surprising” at a time of “financial crisis and transition between administrations” and that the so-called secondments have since declined.
“The Federal Reserve’s practice of temporarily seconding career staff members to other U.S. and international agencies is long-standing,” Skidmore said in a statement. “It benefits the public by deploying expertise where needed. The Federal Reserve benefits as well when career staff members return with valuable experience.”
Detailees include Patrick Parkinson, a Fed veteran who helped draft the Treasury’s financial-law overhaul proposal in 2009 and now heads banking supervision for the Fed; Matthew Rutherford, who in 2008 served as a liaison to the Treasury from the New York Fed and the next year decided to move to Washington to join the department permanently; and Jeremy Rudd, a Fed Board economist who served as deputy assistant secretary for macroeconomic analysis.
“I viewed it as my job to field the best, strongest team I could to put in place the reforms that we felt were important and to deal with the crisis at hand,” Michael Barr, assistant Treasury secretary for financial institutions from 2009 to 2010, said in an interview.
“Certainly, Treasury needed temporary help, and there was a ton of activity going on,” said Barr, now a professor at the University of Michigan’s law school in Ann Arbor. With more work to be done on carrying out the Dodd-Frank law, “Treasury’s going to need to continue to hire people and detail people for some period of time,” Barr said.
Sandra Salstrom, a Treasury spokeswoman, said the practice of temporary assignments “allows the federal government to draw on a vast array of talent and specialized skill sets at critical times.”
“This occurs at agencies across the government and has allowed the Treasury to draw on the expertise of highly specialized economists and market analysts to respond to the worst financial crisis since the Great Depression,” Salstrom said in a statement.
Fed employees who work for other agencies must abide by policies that bar them from sharing confidential information from the central bank, a Fed official said on condition of anonymity. In many cases, the Treasury reimburses the Fed for the employees’ salaries and benefits.
Before the financial crisis, people in the New York Fed markets group had a strong relationship with debt-management officials at the Treasury, says a Treasury official who spoke on condition of anonymity. Today, the connections run deeper, a function of the institutions working together on various fronts during and after the crisis, the official says.
The closer bonds between the Fed and the Treasury are also reflected in the contacts among leaders. Henry Paulson, who became Treasury secretary in 2006, had fewer than 50 contacts with Fed officials, including Bernanke, that year and in the first half of 2007, about one or two per week, based on a Bloomberg News analysis of daybooks released by the Treasury.
Those interactions became near-daily over the next year and several times a day at the height of the financial panic in the second half of 2008.
When Timothy F. Geithner succeeded Paulson in January 2009, after serving since 2003 as New York Fed president, he had about 230 meetings or contacts with the Fed that year and 160 in 2010. His 75 contacts in the first half of 2011 exceed Paulson’s rate before lending markets seized up in mid-2007.
Allan Meltzer, author of a two-volume history of the central bank, said that the “amount of collaboration between the Fed and the Treasury is the highest it’s ever been.” Meltzer sees this as part of a “terribly politicized” Fed supporting the economy with unconventional monetary tools while the White House and lawmakers are unable to win support for additional fiscal measures.
“This is just another example, I think, of the loss of independence,” says Meltzer, a professor at Carnegie Mellon University in Pittsburgh.
Central Bank Independence
The idea that the fiscal and monetary authorities should remain separate is based in part on academic research, including a 1993 paper by Harvard University’s Alberto Alesina and Lawrence Summers, who went on to be Treasury Secretary under President Bill Clinton and economic-policy director under Obama. The paper said greater central-bank independence is associated with lower inflation, yet has “no measurable impact on real economic performance.”
The collaboration between the Fed and Treasury can generate the perception that the central bank is helping finance the federal budget deficit, Poole said. “The issue here is whether there could be, at some point, some reality behind the perception,” he said.
Still, Frederic Mishkin, who served as a Fed governor from 2006 to 2008 and was previously a research director at the New York Fed, disputed the idea that lending staffers to Treasury could compromise the central bank’s independence.
“There’s tremendous expertise at the Fed, which sometimes can be very helpful to the Treasury,” said Mishkin, a Columbia University professor who has collaborated on research with Bernanke. “The idea that the Fed can provide resources to the Treasury when it can be very helpful to them in no way impinges on the Fed’s independence.”
The New York Fed’s AIG analysts detailed to the Treasury, numbering as many as six since January, work behind a locked door on the sixth floor of the central bank’s building near Wall Street, four stories below President William C. Dudley and other senior Fed officials. They keep their Fed salaries and benefits, for which the Treasury reimburses the central bank, a Fed official said on condition of anonymity.
Before the Fed turned over its portion of AIG oversight to the Treasury in January upon AIG’s repayment of a $21 billion Fed loan dating to the 2008 bailout, the analysts were responsible for monitoring AIG’s financial performance and health, a Fed official said. After being detailed to Treasury, they have similar duties of watching the company, according to a Treasury official who spoke on condition of anonymity.
The Treasury holds a 77 percent stake in AIG, which owes $50 billion to the department, down from peak government assistance of $182 billion, which includes funds from the Fed.
Ernest Patrikis, a former general counsel at the New York Fed and AIG, says the extent of the financial crisis warrants the depth of collaboration.
“This is the greatest crisis we’ve seen in our lifetimes, and that to me clearly justifies it,” said Patrikis, who’s now a partner at law firm White & Case LLP in New York. “As the significance of these issues starts to decrease, one would hope and expect that people would return.”
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