Embedded in Jo Becker and Gretchen Morgenson’s New York Times’ expose of Tim Geithner’s tenure as New York Fed chair is a lucid account of what the New York Fed is:

Sitting like a fortress in the heart of Manhattan’s financial district, the New York Fed is, by dint of the city’s position as a world financial center, the most powerful of the 12 regional banks that make up the Federal Reserve system.

The Federal Reserve was created after a banking crisis nearly a century ago to manage the money supply through interest-rate policy, oversee the safety and soundness of the banking system and act as lender of last resort in times of trouble. The Fed relies on its regional banks, like the New York Fed, to carry out its policies and monitor certain banks in their areas.

The regional reserve banks are unusual entities. They are private and their shares are owned by financial institutions the bank oversees. Their net income is paid to the Treasury.

At the New York Fed, top executives of global financial giants fill many seats on the board. In recent years, board members have included the chief executives of Citigroup and JPMorgan Chase, as well as top officials of Lehman Brothers and industrial companies like General Electic.

That’s right: the very companies the Fed regulates make up the New York board. It’s like if the Environmental Protection Agency had board members from Chevron and Exxon Mobile. Or the Consumer Product Safety Commission had board members from Wal-Mart and Mattel. When political appointees in other parts of government like EPA or CPSC are found to have deep ties with industry, it’s a scandal. Yet the New York Fed is institutionally structured this way.

Viewed in this context, it’s no surprise that the New York Fed is alleged to be "more of a Wall Street mouthpiece than a cop" — a regulator that not only didn’t prevent the financial crisis but may have accelerated it. If the Obama administration is serious about a revamp of the financial regulatory structure, it might want to start with changing the New York Fed’s composition.-MB

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