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Part 3 of 3
In fact, say some Goldman executives, the perception of a conflict of interest has actually cost them opportunities in the crisis. For instance, Goldman wasnât allowed to examine the books of Bear Stearns when regulators were orchestrating an emergency sale of the faltering investment bank.
THIS summer, as he fought for the survival of Lehman Brothers, Richard S. Fuld Jr., its chief executive, made a final plea to regulators to turn his investment bank into a bank holding company, which would allow it to receive constant access to federal funding.
Timothy F. Geithner, the president of the Federal Reserve Bank of New York, told him no, according to a former Lehman executive who requested anonymity because of continuing investigations of the firmâs demise. Its options exhausted, Lehman filed for bankruptcy in mid-September.
One week later, Goldman and Morgan Stanley were designated bank holding companies.
âThat was our idea three months ago, and they wouldnât let us do it,â said a former senior Lehman executive who requested anonymity because he was not authorized to comment publicly. âBut when Goldman got in trouble, they did it right away. No one could believe it.â
The New York Fed, which declined to comment, has become, after Treasury, the favorite target for Goldman conspiracy theorists. As the most powerful regional member of the Federal Reserve system, and based in the nationâs financial capital, it has been a driving force in efforts to shore up the flailing financial system.
Mr. Geithner, 47, played a pivotal role in the decision to let Lehman die and to bail out A.I.G. A 20-year public servant, he has never worked in the financial sector. Some analysts say that has left him reliant on Wall Street chiefs to guide his thinking and that Goldman alumni have figured prominently in his ascent.
After working at the New York consulting firm Kissinger Associates, Mr. Geithner landed at the Treasury Department in 1988, eventually catching the eye of Robert E. Rubin, Goldmanâs former co-chairman. Mr. Rubin, who became Treasury secretary in 1995, kept Mr. Geithner at his side through several international meltdowns, including the Russian credit crisis in the late 1990s.
Mr. Rubin, now senior counselor at Citigroup, declined to comment.
A few years later, in 2003, Mr. Geithner was named president of the New York Fed. Leading the search committee was Pete G. Peterson, the former head of Lehman Brothers and the senior chairman of the private equity firm Blackstone. Among those on an outside advisory committee were the former Fed chairman Paul A. Volcker; the former A.I.G. chief executive Maurice R. Greenberg; and John C. Whitehead, a former co-chairman of Goldman.
The board of the New York Fed is led by Stephen Friedman, a former chairman of Goldman. He is a âClass Câ director, meaning that he was appointed by the board to represent the public.
Mr. Friedman, who wears many hats, including that of chairman of the Presidentâs Foreign Intelligence Advisory Board, did not return calls for comment.
During his tenure, Mr. Geithner has turned to Goldman in filling important positions or to handle special projects. He hired a former Goldman economist, William C. Dudley, to oversee the New York Fed unit that buys and sells government securities. He also tapped E. Gerald Corrigan, a well-regarded Goldman managing director and former New York Fed president, to reconvene a group to analyze risk on Wall Street.
Some people say that all of these Goldman ties to the New York Fed are simply too close for comfort. âItâs grotesque,â said Christopher Whalen, a managing partner at Institutional Risk Analytics and a critic of the Fed. âAnd itâs done without apology.â
A person familiar with Mr. Geithnerâs thinking who was not authorized to speak publicly said that there was âno secret handshakeâ between the New York Fed and Goldman, describing such speculation as a conspiracy theory.
Furthermore, others say, it makes sense that Goldman would have a presence in organizations like the New York Fed.
âThis is a very small, close-knit world. The fact that all of the major financial services firms, investment banking firms are in New York City means that when work is to be done, youâre going to be dealing with one of these guys,â said Mr. Langevoort at Georgetown. âThe work of selecting the head of the New York Fed or a blue-ribbon commission â any of that sort of work â is going to involve a standard cast of characters.â
Being inside may not curry special favor anyway, some people note. Even though Mr. Fuld served on the board of the New York Fed, his proximity to federal power didnât spare Lehman from bankruptcy.
But when bankruptcy loomed for A.I.G. â a collapse regulators feared would take down the entire financial system â federal officials found themselves once again turning to someone who had a Goldman connection. Once the government decided to grant A.I.G., the largest insurance company, an $85 billion lifeline (which has since grown to about $122 billion) to prevent a collapse, regulators, including Mr. Paulson and Mr. Geithner, wanted new executive blood at the top.
They picked Edward M. Liddy, the former C.E.O. of the insurer Allstate. Mr. Liddy had been a Goldman director since 2003 â he resigned after taking the A.I.G. job â and was chairman of the audit committee. (Another former Goldman executive, Suzanne Nora Johnson, was named to the A.I.G. board this summer.)
Like many Wall Street firms, Goldman also had financial ties to A.I.G. It was the insurerâs largest trading partner, with exposure to $20 billion in credit derivatives, and could have faced losses had A.I.G. collapsed. Goldman has said repeatedly that its exposure to A.I.G. was âimmaterialâ and that the $20 billion was hedged so completely that it would have insulated the firm from significant losses.
As the financial crisis has taken on a more global cast in recent weeks, Mr. Paulson has sat across the table from former Goldman colleagues, including Robert B. Zoellick, now president of the World Bank; Mario Draghi, president of the international group of regulators called the Financial Stability Forum; and Mark J. Carney, the governor of the Bank of Canada.
BUT Mr. Paulsonâs home team is still what draws the most scrutiny. âPaulson put Goldman people into these positions at Treasury because these are the people he knows and there are no constraints on him not to do so,â Mr. Whalen says. âThe appearance of conflict of interest is everywhere, and that used to be enough. However, weâve decided to dispense with the basic principles of checks and balances and our ethical standards in times of crisis.â
Ultimately, analysts say, the actions of Mr. Paulson and his alumni club may come under more study.
âI suspect the conduct of Goldman Sachs and other bankers in the rescue will be a background theme, if not a highlighted theme, as Congress decides how much regulation, how much control and frankly, how punitive to be with respect to the financial services industry,â said Mr. Langevoort at Georgetown. âThe settling up is going to come in Congress next spring.â
Source:
http://www.nytimes.com/2008/10/19/b...&scp=2&sq="Julie Creswell"&st=cse&oref=slogin
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