Geithner Gave Official a Waiver on Share Holdings

By:  Siobhan Hughes and Michael S. Derby
The Wall Street Journal

The Federal Reserve Bank of New York again is facing scrutiny over stockholdings held by a senior official during the 2008 financial crisis.

Then-New York Fed President Timothy Geithner issued a waiver that allowed William Dudley -- executive vice president of the regional Fed bank's markets group -- to work on the controversial bailout of American International Group Inc. even though he held shares in the company, according to a congressional audit report released Thursday.

The government has been criticized by legislators, investors and others for ensuring that major Wall Street banks including Goldman Sachs Group Inc., which had significant financial exposure to AIG, were repaid in full.

The New York Fed, whose role in buying and selling government securities makes it the most powerful of the Federal Reserve's 12 regional banks, played an important role in shaping Washington's response to the crisis.

The waiver allowed Mr. Dudley, a former Goldman economist who became New York Fed president in January 2009, to also work on issues involving General Electric Co., another company that received U.S. assistance, even though he also held shares in that company.

Mr. Geithner now is U.S. Treasury Secretary. A Treasury spokeswoman referred calls to the New York Fed.

All of Mr. Dudley's AIG and GE shares have been sold; the New York Fed didn't disclose additional information on the holdings. In a statement, the New York Fed said Mr. Dudley "volunteered to dispose of the shares at predetermined dates, agreed to by the New York Fed's ethics office."

The Fed has yet to update its conflict-of-interest policies to "more fully reflect" potential conflicts that could arise in financial crises, the report found.

The Government Accountability Office said the Fed should consider altering its conflict-of-interest policies, including addressing conflicts related to nonbank institutions that participate in emergency programs.

AIG wasn't regulated by the Fed before the bailout, and as a result wasn't covered by existing restrictions on investment holdings.

AIG shares lost most of their value when the insurer was bailed out in September 2008 and remain well below precrisis levels. AIG declined to comment.

In a statement accompanying the report, Fed General Counsel Scott Alvarez said the Fed would give the recommendation and others "serious attention" to the extent that the issues hadn't already been addressed.

This isn't the first time the New York Fed has faced potential conflicts over financial holdings. Two years ago, Stephen Friedman resigned as chairman of the New York Fed after The Wall Street Journal reported about his dual role at the Fed and as a Goldman director and shareholder.

The Journal disclosed that Mr. Friedman continued to buy Goldman shares after Goldman converted from an investment bank to a Fed-regulated bank holding company in September 2008, when his status as a Goldman director and shareholder was in violation of Fed policy that bars certain Fed-bank directors from being shareholders, directors or officers of commercial banks.

Mr. Friedman, who eventually was granted a Fed waiver on the issue, has said he did nothing wrong.

The GAO report, mandated by the Dodd-Frank law, said the New York Fed's chief ethics officer recommended the waiver in part because selling the stock could have put Mr. Dudley in violation of securities laws because of his access to material, nonpublic information about the companies.

The ethics officer also cited the critical role Mr. Dudley played at the Fed and a determination that his holdings didn't exceed a $15,000 level under federal ethics regulations.

The potential conflicts identified in the report reflect the unexpected position the Fed found itself in during the financial crisis, as central bankers were forced to move quickly to rescue a range of private institutions.

"The world was changing so quickly and so dramatically, they were not able to catch up" and adjust their internal conflict policies, said Tim Duy, an economist with the University of Oregon. Mr. Duy added that "the real failures" at the Fed came before the crisis, when he said it failed to adequately regulate banks and make sense of what was happening in housing markets.

"No one who works for a firm receiving direct financial assistance from the Fed should be allowed to sit on the Fed's board of directors or be employed by the Fed," Sen. Bernie Sanders (I. Vt.) said in a statement.

Mr. Sanders had asked for the report, which was mandated by the Dodd-Frank financial-overhaul law.

Mr. Dudley's waiver was granted Sept. 19, 2008, three days after the Federal Reserve Board authorized the New York Fed to help AIG. Other employees were also granted waivers during the crisis, although some were required to sell their holdings, the report found.

Without a waiver, "employees were prohibited from working on an emergency program while holding investments that would be affected by their participation in matters concerning those programs," the report said, citing staff from the New York Fed.

The GAO report also found the Fed's regional banks relied on outside firms to manage many of the bailout programs, including the $30 billion rescue of Bear Stearns Cos. mortgage-related assets.