Wonder why lawmakers on both sides of the aisle are so irritated by the Federal Reserve Bank of New York? It’s not just that it sometimes appears to have been captured by the banks it’s supposed to regulate. It’s that members of Congress have an extremely hard time figuring out what’s going on inside it.
You see, the Federal Reserve Board of Governors in Washington is subject to the Freedom of Information Act. But the New York Fed, along with the other 11 regional banks, is not. It says so right here (PDF).
“Congress is very uncomfortable with the fact there’s this body out there that has all this power and they, who are constitutionally entitled to exercise that power, have very little say about how it is exercised,” Peter Wallison, a former Department of the Treasury general counsel, told Bloomberg News.
On Friday, Senate Democrats ripped New York Fed President William Dudley in a hearing called by Sherrod Brown, the Ohio senator who chairs the Senate Banking Subcommittee on Financial Institutions and Consumer Protection.
“Is there a cultural problem at the New York Fed? I think the evidence suggests that there is,” Senator Elizabeth Warren of Massachusetts said. “Either you need to fix it, Mr. Dudley, or we need to get someone who will.”
In a dramatic flourish, Carmen Segarra attended the hearing, sitting behind Dudley within view of the TV cameras. Segarra is the former New York Fed bank examiner who secretly recorded conversations that she said showed regulators were too deferential toward Goldman Sachs (where Dudley used to work).
Although no Republicans attended the hearing, the GOP is at least as annoyed with the New York Fed as the Democratic Party is. Senator Rand Paul of Kentucky has repeatedly pushed for an “audit the Fed” bill. Alabama Senator Richard Shelby has a testy relationship with Fed Chair Janet Yellen, whose confirmation to run the Fed he voted against last year.
The regional Fed banks are exempt from the Freedom of Information Act because they are not federal agencies. The New York Fed says it “has committed to comply with the spirit of FOIA” despite its exemption but won’t reveal (PDF), among other things, “inter-department or intra-department memoranda, notes or letters consisting of analysis, minutes, opinions or recommendations and including those records that are privileged and confidential attorney work product, attorney-client communications, pre-decisional, or otherwise privileged and confidential” documents.
The insulation of the regional banks stems from a 1928 Supreme Court decision, United States Shipping Board Emergency Fleet Corporation v. Western Union Telegraph Co., which confirmed that “instrumentalities like the national banks or the federal reserve banks, in which there are private interests, are not departments of the government. They are private corporations in which the government has an interest.”
Big and small banks in the New York Fed’s district own shares in it. Of its nine directors, six are elected by member commercial banks and three by the Fed Board of Governors. Three of the nine directly represent the banks, while six are required to represent the public with “due but not exclusive consideration to the interests of agriculture, commerce, industry, services, labor, and consumers.”
Insulation from Congress is supposed to give the regional banks the power to make decisions on monetary policy and regulation without concern for politics. Ultimately, though, if Congress feels that the Fed and the regional banks are out of control, it can change the law and bring them more directly under its control. As the Federal Reserve Board of Governors in Washington observes, “the Federal Reserve can be more accurately described as ‘independent within the government’ rather than ‘independent of government.’ ”
Belatedly, perhaps, the Fed is trying to show that it can govern itself. On Thursday the Board of Governors announced not one but two reviews, one by its inspector general on whether the reserve banks and the board are getting the information they need to supervise, including “divergent views,” and one by the board itself on its ability to supervise the biggest banks.