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The Federal Reserve - isn't

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By Bill Sharon March 29, 2008

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The Federal Reserve is not part of the federal government. Regrettably, most Americans are ignorant of this fact. Since the members of the Board of Governors of the Fed are appointed by the president, the assumption is that it is another agency of the executive branch, but nothing could be further from the truth. It is owned primarily by private banks that are shareholders and appoint two thirds of the members of the boards of directors of the twelve regional Federal Reserve banks.

In this context, the expanded powers of the Fed that are being proposed by the Bush administration (and the weakening of the powers of the Securities and Exchange Commission) presents an interesting event in what passes for risk management these days in the financial services system. Barney Frank, the chairman of the House Financial Services Committee, has, in effect, signed on to this plan following an epiphany some time ago that occurred during his conversation with Charles O Prince III, the former chairman of Citibank. According to the New York Times, Mr. Prince was explaining that “structured investment vehicles” were kept off the balance sheet so that his bank could compete with investment banks. Somehow the practices of commercial banks using archaic accounting to keep investments off their books led to the conclusion that regulation should extend to investment banks and hedge funds. There doesn’t seem to be any mention of getting those “structured investment vehicles” back on the balance sheet.

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