New York Fed Chair Stephen Friedman Resigns: About Time

The chairman of the board of the Federal Reserve of New York, Stephen Friedman, resigned today — a resignation doubtlessly timed to coincide with the much bigger news of the day, the release of the stress test results.  (I’ll get back to those in a bit).  Though he had earlier announced his intention to resign at the end of the year, he moved the date up as criticisms of his overlapping role at the Fed and on the board of Goldman Sachs have mounted.

The Wall Street Journal ran an A-1 story this week that started thus:

The Federal Reserve Bank of New York shaped Washington’s response to the financial crisis late last year, which buoyed Goldman Sachs Group Inc. and other Wall Street firms. Goldman received speedy approval to become a bank holding company in September and a $10 billion capital injection soon after.

During that time, the New York Fed’s chairman, Stephen Friedman, sat on Goldman’s board and had a large holding in Goldman stock, which because of Goldman’s new status as a bank holding company was a violation of Federal Reserve policy.

The New York Fed asked for a waiver, which, after about 2½ months, the Fed granted. While it was weighing the request, Mr. Friedman bought 37,300 more Goldman shares in December. They’ve since risen $1.7 million in value.

Mr. Friedman also was overseeing the search for a new president of the New York Fed, an officer who has a critical role in setting monetary policy at the Federal Reserve. The choice was a former Goldman executive.

The WSJ has been putting up new pieces every day as criticism of Friedman’s moves has mounted.  He’s not a bad target.  He’s purchased more than 50,000 new shares in Goldman since the bank came under Fed regulation last fall, and never mentioned any of those purchases to the NYFed.  His claims that he saw “no conflict whatsoever in owning shares” is at best self-deluding and more likely disingenuous.  Whether or not Friedman was involved in day-to-day decision making at the Fed — and his spear-heading of the search for a new president certainly makes him seem very involved — as a Class C director, appointed to represent the public, holding shares in any bank or bank holding company seems like a dangerous contradiction.

Now, it’s true that Friedman wasn’t initially in conflict with Fed policy — only when Goldman became a bank-holding company, instead of an investment bank, did he come into explicit conflict with the rules, and at that point the NYFed lawyers sought a waiver.  In January, they concluded he hadn’t broken any internal rules — and even in the statement released by the NYFed, the general counsel says “these purchases did not violate any Federal Reserve statute, rule or policy.”

Which makes it seem all the more important that those statutes, rules, and policies get changed. 

Though Friedman showed some terrible judgment here, the other villain of this story is whoever in the Washington, D.C. Fed offices decided to grant the waiver that allowed Friedman to continue in his conflicting role.  The defense that the NYFed has mustered so far for keeping Friedman around is that his leadership was necessary because the NYFed was already functioning without a president, after Tim Geithner became the Treasury nominee in November.  If that was true — if Friedman was so valuable to the company — then the company should have worked harder to convince Friedman to sell of his shares and resign from Goldman.  Instead, they chose to grant a waiver to a rule that, really, is a pretty reasonable rule, one that’s built to arm against exactly the kinds of conflicted decisions that seem to have been made here.

The WSJ reports that many of the other 11 regional Fed banks already have or are supportive of changing and clarifying the rules.  I hope that’s true.  Until then, it falls upon the Wall Street Journals of the world to find this stuff out and push for change — and we may be destined to see the resolution of the problem coming, as it did in this case, too late.

WSJ: Chrysler Heads to Bankruptcy, Or Fiat, Or Not, Or…?

The Wall Street Journal has a rambling piece about the possible future of Chrysler that starts with this:

Chrysler LLC is preparing to file for Chapter 11 bankruptcy protection as soon as next week, whether or not it reaches a deal with its lenders or forges an alliance with Fiat SpA, said several people familiar with the matter.

This sentence kicks off an 1,100 word article in which only three words — “in its totality,” in the last line — are attributed to anyone by name.  The rest of the article quotes:

• “these people” (x4)
• “people familiar with the matters”
• “people familiar with the matter” (again)
• “Fiat” (no clarification on whether that’s the whole company, the signage out front, or someone’s talking car)
• “The Obama administration” (again, no clarification on whether they spoke united)
• “an administration official”
• “one person”
• “people familiar with the situation” (x2)
• “Obama advisers”
• “Officials with President Barack Obama’s auto task force”
• “people familiar with the talks”

That final quote from Fiat CEO Sergio Marchionne came from a conference call.

From this combination, it’s hard to figure out whether there’s any original reporting at all in this story.  It’s also hard to tell what qualifies one to be a person familiar with the situation — let’s hope it requires more than just reading WSJ coverage every day.

The point the story starts out making — that Chrysler is going into bankruptcy even if it cuts a deal with its lenders — is seriously undercut by anonymous quotes within.  We start with the above lede, then travel to someone in the administration and an unnamed Fiat negotiator saying that bankruptcy won’t be necessary, travel to a Chrysler source saying to lenders (via some third party source) that yes, they’re going into bankruptcy so Fiat can pick and choose pieces of Chryster, then finally land on Marchionne’s quote that Fiat is “interested in Chrysler ‘in its totality.'”  In the middle, there’s a side-show story about Fiat seeking a possible merger with G.M. — and the story says both that this will be only a takeover of G.M. European Opel division and a way for Fiat to spread into the American market.

I should not be more confused at the end of the story than I am at the beginning — unless the point of the story is to show the chaos that’s currently reigning within automaker negotiations.  What I get a sense of here instead is the chaos in the newsroom of a paper that sees itself as the premiere source of business news in the country.  Really, it took five reporters to write this?

A friend on OS asked a while back why there aren’t any embeds in the financial crisis — people on the ground, covering the story from within, sending reports back from the front lines.  I spent some time trying to answer this, and kept coming back to the same problem: Embedding a reporter in a bank — in any private enterprise — would seem to be a breach of privacy.  At best, even assuming a reporter did get internal access to the major goings-on, I figured we’d end up with some Bob Woodward-like book on the financial crisis a year after things are concluded, revealing who made who do what and for how much (read that in any way you want — I assume it’s all very messy in the banking industry right now).

But while real-time insider reporting might not be feasible, actual reporting is necessary.  As I rarely spend a day making any calls myself, I’m lecturing from a glass podium on a stage made of very thin crystal — but I’m an unpaid opinion writer, whereas the five reporters who contributed to this Wall Street Journal article about what could be one of the more important financial incidents in a year that hasn’t yet been boring get paid to go out and report the news.  That means not just talking to sources, but getting them to go on the record — and when they won’t go on the record, it means finding more sources who will.  It means telling a story that makes sense, and that’s credible, and that can be tracked and proven.

It also means reporting without a pre-set agenda.  Consider these three paragraphs:

Reorganizing three auto makers on three continents could move the world-wide car industry a big step toward the kind of large-scale consolidation that long has been overdue. For years, auto makers have struggled with excess capacity that has fostered intense price competition and squeezed profits.

The problem has festered because stronger car makers have steadily added plants while governments often have stepped in to prop up ailing car companies to preserve jobs.

Any bid to restructure three auto makers is likely to prove highly complex and risky for the companies involved and the Obama administration. Chrysler is in such bad shape precisely because its cross-border merger with Daimler AG ended in failure after eight years.

That may all be true, but I have no idea who’s claiming it.  Who says consolidation is long overdue?  The reporters?  Half of the reporters?  An unnamed source?  The Wall Street Journal itself?

Hundreds of experts exist in the U.S. who would have been willing to assist in this story, even on a Thursday when there’s good new T.V. to watch.  Likewise, though perhaps no one directly involved with the ongoing negotiations might be willing to go on the record, official sources at all of the companies involved get paid to answer media inquiries, and I bet even their non-denial denials of the statements above would have told us something.

Beyond even that, every time the government thinks about making a deal, a tree dies.  There’s paper out there.  Someone must have been willing to hand over a report or a sketch of where things could be headed.  Someone must be already working on the court filing for Chrysler.

I agree whole-heartedly with Glenn Greenwald that anonymity is being granted all too often these days, and I think we’re in more danger of being complacent about it when it appears in an article full of numbers and semi-familiar economic arguments.  The more complex the argument, the more carefully it should be explained.  The more controversial the event, the higher the bar for granting anonymity.

The more I read of the Wall Street Journal, the more frustrated I get.