Fed toughens conflict rules

The Federal Reserve tightened up its ethics rules yesterday, six months after a conflict-of-interest scandal led the chairman of the New York Fed’s board of directors to resign.

The new rules, released quietly before the Thanksgiving holiday weekend, mean that anyone representing the public on the board of a regional Fed bank must cut their ties to companies that become banks or become owners of banks. Or, they’ll have to resign from their Fed seat.

The Fed came under fire from lawmakers and investors for letting Stephen Friedman, a former head of Goldman Sachs, remain chairman of the New York Fed after Goldman became a bank holding company in the financial crisis.

Friedman, a Goldman board member, was named the New York Fed chairman in early 2008. When Goldman fell under the Fed’s supervision, the relationship violated Fed policy, but he was granted a waiver.

Goldman was one of nine big banks the Treasury aided with capital injections in early October. The government also decided, partly at the urging of New York Fed officials, to provide insurer American International Group with tens of billions in bailout money, which enabled AIG to pay $8.1 billion it owed to Goldman.

Friedman, who maintained that there was nothing improper about his roles, also bought additional Golman shares during the crisis, building up his stake in the company to $19 million.

Friedman, 72, head of Stone Point Capital, resigned his Fed seat in May.