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N.Y. Fed Chairman Resigns
Friedman's Role as Goldman Sachs Director Questioned

By Neil Irwin
Washington Post Staff Writer
Friday, May 8, 2009

The chairman of the Federal Reserve Bank of New York resigned yesterday after questions were raised about his role as a director of Goldman Sachs and his purchases of stock in the company, which is regulated by the New York Fed.

Stephen Friedman, a onetime chairman of Goldman and economic adviser to President George W. Bush, said in his resignation letter that his continued presence would be a "distraction" for the central bank.

Goldman came under direct supervision of the New York Fed in September, when it was granted emergency permission to change its charter to become a bank holding company. Rather than step down from either board, Friedman requested a waiver from normal Fed rules to continue serving, actions that were reported Monday by the Wall Street Journal. He bought $3 million worth of Goldman Sachs stock in December, after the firm had come under the umbrella of the New York Fed.

As chairman of the New York Fed, Friedman had no role in the day-to-day supervision of Goldman or the bank's policies in response to the financial crisis. But he did take the lead in selecting Timothy F. Geithner's successor as president of the reserve bank, which is at the front lines of the government's oversight of the financial system. The board named William C. Dudley, who was chief economist at Goldman until 2006, as president of the bank when Geithner was named Treasury secretary. That decision had to be approved by the Fed Board of Governors in Washington.

In recent days, Friedman's dual role has become Exhibit A for what critics perceive as a too-cozy relationship between the New York Fed, which serves as the central bank's eyes and ears on Wall Street, and the bankers it oversees. Friedman's decision to step down from the New York Fed board was his own, according to sources familiar with the matter, who were not authorized to speak publicly.

The New York Fed has long had leading financial executives on its board. Richard S. Fuld Jr., chief executive of Lehman Brothers, was one of them, and he stepped down only days before his company sought bankruptcy protection in September. Even non-financial executives on the board frequently come from major corporations, such as General Electric chief executive Jeffrey Immelt.

Friedman was automatically succeeded as chairman by Denis M. Hughes, who is less likely to be accused of representing the interests of large financial companies: Hughes is president of the New York State AFL-CIO.

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