Federal Reserve banks need stronger policies to prevent conflicts of interest, a government watchdog said Wednesday.
The banks' board members have apparent conflicts of interest because of their day jobs as executives and corporate directors, the non-partisan Government Accountability Office said in an audit. It said the Fed banks should document directors' roles in overseeing financial companies and request waivers when needed.
The apparent conflicts drew attention during the financial crisis, when an official who served on the boards of Goldman Sachs Group Inc. and the Federal Reserve Bank of New York bought Goldman stock.
Stephen Friedman was chairman of the Federal Reserve Bank of New York, and a director of Goldman, when Goldman came under the Fed's supervision in September 2008. He continued to lead the New York Fed as it propped up Goldman and other banks by offering them billions in aid.
The GAO did not identify any actual conflicts of interest, but it said that the mere appearance of conflicts fuels doubts about the Fed's policies.
"Without more public disclosure of governance arrangements, such as board of director bylaws and director eligibility and ethics policies, there may be continued concerns about Reserve Bank governance and the integrity of the Federal Reserve," the audit says.
The 12 regional banks in the Fed system are private companies, and are not part of the U.S. government. They are owned by the banks that they regulate. Each board has three members who represent those banks and six who represent the public.
Their six public directors are supposed to be drawn from the fields of agriculture, commerce, industry, services, labor and consumer advocacy. Labor and consumer groups are underrepresented, the GAO said.
The audit also criticized the boards' lack of diversity. They are composed mainly of white men, in part because they include mostly senior executives, it said. The GAO analyzed data from the Equal Employment Opportunity Commission and found that diversity in the pool of candidates is severely limited.
The GAO recommended that Fed banks consider a wider range of candidates for their boards, document directors' roles and responsibilities, request waivers when conflicts are possible and post more documents on their websites.