I've written previously about the political power of Goldman Sachs and how they have used that power during this financial "crisis" to increase their standing in the economic world in my article "Goldman Sachs: Wall St. Gangstas". Now lest you think that I have become obsessed with the GS gang, let me assure you that I have not.
But there is that principle that says that once you begin to become newly aware of something, then you will begin to see it everywhere. It's not that these objects magically appear, it is just that something you would not have payed attention to before suddenly gets your attention. For instance, lets say that you have just decided to buy a hybrid car. Suddenly you realize just how many of these vehicles are on the road, whereas before you hadn't payed any attention to it. It's not that they suddenly appeared out of nowhere, it's just that you were busy focusing on other things. After all, how much information are we exposed to everyday, and how much of that do we process and bother to remember?
So it is with me and Goldman Sachs. Today I was doing some research on the Federal Reserve, and decided to go to the website of the Federal Reserve of New York. There I found a page that has an org chart of the New York Fed.
At the top of that org chart is the Chairman Stephen Friedman. And if you click on that link you'll find that he is a former chairman of Goldman Sachs. Wow, just like Secretary of the Treasury "Hank" Paulson. What a coincidence, or not!
The Federal Reserve consists of 12 regional banks, but it is widely accepted that the most powerful of these regional banks has always been the New York Fed. And if you think that might have changed through the years then how about this.
The Federal Open Market Committee (FOMC) created under 12 U.S.C. § 263 comprises the seven members of the board of governors and five representatives selected from the regional Federal Reserve Banks. The FOMC is charged under law with overseeing open market operations, the principal tool of national monetary policy.So there are 5 representives from the regional Federal Reserve Banks on the FOMC which directly determines monetary policy, like setting interest rates and deciding whether to let Lehman Brothers go bankrupt or whatever. But there are 12 regional banks so obviously some are not going to be represented. What's the Fed to do?
The Federal Reserve Bank of New York president always sits on the Committee, and the other presidents serve one-year terms on a rotating basis. The rotating seats are filled from the following four groups of Banks, one Bank president from each group: Boston, Philadelphia, and Richmond; Cleveland and Chicago; Atlanta, St. Louis, and Dallas; and Minneapolis, Kansas City, and San Francisco.So the New York Fed has a permanent seat, kind of like the US has a permanent seat in the UN Security Council. It sure looks like the New York Fed is still king of the hill to me. But if you are still not convinced then here it is stated plainly and simply.
Since the founding of the Federal Reserve banking system, the Federal Reserve Bank of New York in Manhattan's Financial District has been the place where monetary policy in the United States is implemented, although policy is decided in Washington, D.C. by the Board of Governors of the Federal Reserve System. The New York Federal reserve is the largest, in terms of assets, and the most important of the twelve regional banks. Operating in the financial capital of the U.S., the New York Fed is responsible for conducting open market operations, the buying and selling of outstanding U.S. Treasury securities.You can't argue with that. But now you will point out that it is the President and not the Chairman of the New York Fed who gets to vote. Well yes, but normally the President of a Corporation like the New York Fed will get its instructions from the Board and especially the Chairman of the Board. The President is after all appointed by the Board. So it looks like the GS gang is firmly in control at the New York Fed.
The New York Federal Reserve is the only regional bank with a permanent vote on the Federal Open Market Committee and its president is traditionally selected as the Committee's vice chairman.
But wait, there's more
That's just one detailed example of the power and influence of the GS gang in government and in the Federal Reserve. Remember that the Federal Reserve is a private corporation and not part of the US government. Although of course the Fed does hold substantial power over the government by setting the monetary policy, and conversely the Board of Governors is appointed by the President with Congressional approval. But once appointed the Board of Governors is independent of the Government. And the terms of appointment are for 14 years. Just imagine if we had Presidential elections every 14 years. How responsive do you think the President would be to the American People under those circumstances?
Here are some more examples of Goldman Sachs power taken from the article "The Goldman touch". (I have also posted a copy of this article on my blog for safe keeping in case the link gets stale.)
- Henry "Hank" Paulson - Current Secretary of the Treasury of the US, former Chairman and CEO of Goldman Sachs. OK, you already knew that one.
- Mark Carney - Governor of the Bank of Canada. Before joining the public service, Carney had a thirteen-year career with Goldman Sachs in its London, Tokyo, New York and Toronto offices. He was heavily involved in Goldman Sachs's work with the Russian financial crisis of 1998.
- Mario Draghi - Governor of the Bank of Italy. He was a London-based partner at Goldman from 2002 to 2005.
- John Thain, who once ran Goldman's mortgage desk, was hired late last year to take over troubled Merrill Lynch & Co. Mr. Thain was running the New York Stock Exchange at the time of his hiring.
- Joshua Bolten, took over April 14, 2006, as President George W. Bush's Chief of Staff "with authority to do whatever he deemed necessary to stabilize Bush's presidency, and he has moved quickly with changes". He was Executive Director for Legal and Government Affairs at Goldman Sachs in London from 1994 to 1999.
- Robert Steel was appointed by Paulson to be Under Secretary for Domestic Finance. He was lured away from Mr. Paulson's Treasury to resuscitate Wachovia Corp., the fourth-largest U.S. bank. (Or at least they were before they collapsed.) Mr. Steel is a former Goldman Sachs Vice Chairman.
- Paulson replaced Mr. Steel with Ken Wilson, the head of Goldman Sachs's financial services group. The Wall Street Journal describes him as, "The Goldman Sachs Man Behind Your Bailouts". I particularly liked this qoute, "[he] will be unpaid until Jan. 1, at which point Wilson will return to Goldman Sachs." So he is working on the bailout as a charity project. Right.
The same phenomenon is visible in other countries, as well. Indeed, there were three ex-Goldman executives at the table in April when the Group of Seven finance ministers and central bank governors turned their attention fully to the credit crisis at a meeting in Washington.But is there some sort of nefarious conspiracy here? No, of course not according to the article.
Along with Mr. Paulson, there was Mr. Carney, who had taken up his job as head of Canada's central bank only a couple of months earlier, and Bank of Italy Governor Mario Draghi, who was a London-based partner at Goldman from 2002 to 2005. Mr. Draghi also leads the influential Financial Services Forum of central bankers and regulators, which spent six months preparing the report that became the basis of the G7's demands for more transparency by banks and other regulatory changes.
Of course, this cloistered culture, populated as it is by power and wealth, has roused its share of suspicion among outsiders, who view the firm as a kind of secret society – just do a Google search on “Goldman Sachs and conspiracy.”Oh, I feel much better now.
Current and former Goldmanites dismiss the notion that the spread of former executives to positions of influence is a Machiavellian plot to further enrich the company. There are no secret handshakes, they insist; no covert collaboration to extend the firm's reach.