The new nexus of attention is now moving to the Federal Reserve and, most pointedly, the Federal Reserve Bank of New York. This does not bode well for our Treasury Secretary Timothy Geithner who was FRBNY President from 2003 until 2009.

Let's step beyond the knowledge that JP Morgan Chase's CEO, Jaime Dimon, sits on the board of the Federal Reserve Bank of New York (FRBNY), JPM's primary regulator. Let's also overlook that the FRBNY just replaced experienced regulators with junior staffers who lack the expertise to ask tough questions and critically examine labyrinthine records. The common practice of the primary regulatory organization, The Fed, extends many years back into the past.

The influence of former Fed Chairman Alan Greenspan, nominated to the top spot by Ronald Reagan, permeated the "magic of the marketplace" deregulatory attitude of the time. Greenspan's tenure amplified devout faith that complex systems would take care of themselves. Comments from January 2006 Fed meeting minutes underline the emasculation of the FRBNY and The Federal Reserve itself.



CHAIRMAN GREENSPAN. Vice Chair. VICE CHAIRMAN GEITHNER. Mr. Chairman, in the interest of crispness, I’ve removed a substantial tribute from my remarks. [Laughter] CHAIRMAN GREENSPAN. I am most appreciative. [Laughter] VICE CHAIRMAN GEITHNER. I’d like the record to show that I think you’re pretty terrific, too. [Laughter] And thinking in terms of probabilities, I think the risk that we decide in the future that you’re even better than we think is higher than the alternative. [Laughter] With that, the economy looks pretty good to us, perhaps a bit better than it did at the last meeting…

The same minutes and other comments throughout 2006 show a clueless Federal Reserve Board of Governors that downplayed any threat that housing posed to the overall financial system and the nation's economic security.

Consider the historical duties that were placed upon the FRBNY in the aftermath of the 1929 crash. John Kenneth Galbraith eloquently described the role of this powerful regulator that stands on the doorstep of Wall Street. Galbraith also circumscribes an aspect of regulatory capture: naïve faith in the system.



The powers of the Federal Reserve Board – now styled the Board of Governors, the Federal Reserve System – have been strengthened both in relation to the individual Reserve banks and the member banks. [...] The New York Federal Reserve Bank retains a measure of of moral authority and autonomy, but not enough to resist any Washington policy. Now also there is power to set margin requirements. [...] The market will not go into speculative rampage without some rationalization. But during any future boom some newly rediscovered virtuosity of the free enterprise system will be cited. Among the first to accept these rationalizations will be those responsible for invoking the controls. They will say firmly that controls are not needed. – The Great Crash, Pp. 189-190



Then-FRBNY President Timothy Geithner testified that he never associated his role at the bank with regulation of the financial firms that populate the Second Federal Reserve district.

"First of all, I've never been a regulator...I'm not a regulator."





Those words have haunted Secretary Geithner throughout his tenure at Treasury. Those utterances at his March 2009 confirmation hearings have new life now that Libor manipulation was discussed on his watch at the helm of the FRBNY. (In fact, Federal Reserve officials published suspected Libor manipulation in this 1998 report (PDF).) The Wall Street Journal reports that more documents relating to Libor manipulation will be released in the next few days.

The fact remains that Geithner could have imposed a change of course upon the crooked banks, even referring rate manipulation to the Justice Department for investigation and possible criminal prosecution.

But he didn't.

Britain's The Guardian delivers damaging tidings for Secretary Geithner and former Barclays CEO Bob Diamond:



John Coffee, a Columbia Law School professor, said the scandal was proving as damaging for regulators as bankers.



The fallout from the scandal is already hitting Obama's team. Geithner was president of the Federal Reserve bank of New York when the alleged manipulations took place and was aware of some of the issues. Geithner held a meeting on April 28 2008 titled "Fixing Libor" and communicated his concerns to the UK authorities but no further action appears to have been taken. He also regularly spoke to senior figures at Barclays, including Diamond.

John Coffee suggests that the personal relationship between Geithner and his bankster buddies could have been more important than doing his job – as a regulator.



