Dudley Proves This Isn’t Your Father’s New York Federal Reserve
Bloomberg Markets Magazine
It’s a quiet September morning outside the headquarters of the Federal Reserve Bank of New York on Liberty Street in downtown Manhattan.
The 22-story building, made of limestone and sandstone blocks and decorated with wrought iron, embodies the secrecy with which the central banking system has operated since its founding in 1913. The ground floor, with its vaulted ceilings and iron chandeliers, houses an exhibit on the history of money. In a 10th-floor conference room, William C. Dudley, president of the New York Fed, sits in a leather chair and explains how he’s trying to change the image of the central bank as a closed club that caters to Wall Street at the expense of everyone else, Bloomberg Markets magazine reports in its November issue.
“It’s important for us to get out into the community to get our message across to explain why we do what we do,” says Dudley in a rare interview, breaking with the Fed bank’s traditional aversion to publicity. “That’s important, because to a lot of people, it’s pretty mysterious what the Federal Reserve does.”
Dudley, who was chief U.S. economist at Goldman Sachs Group Inc. (GS) from 1996 to 2005, has spent more time talking to people in his district than any of his nine predecessors, according to the New York Fed. At these gatherings of local businesspeople in places like the borough of Queens, New York, Dudley speaks about the Fed’s unprecedented moves to revive the economy and often faces pointed questions from the crowd.
‘Something Very Unfair’Why did the Fed spend billions in tax dollars to bail out Wall Street during the credit crisis and not help small businesses get loans? Why hasn’t the Fed forced banks to modify mortgages? Isn’t the Fed causing food prices to spike?
Back at headquarters, Dudley says he understands why people are so angry.
“There is something very unfair about what happened,” he says. “The fact that bankers and financiers invented all sorts of crazy products, introduced them in a way that wasn’t well thought through and that caused a financial calamity, and then the financial system got rescued while the financial crisis caused them to lose their jobs -- it’s completely unfair.”
Dudley, 58, is grappling with some of the biggest challenges that a New York Fed president has ever faced. The New York Fed board appointed him in January 2009 in the middle of the worst financial crisis in decades, after Timothy F. Geithnerleft to become President Barack Obama’s Treasury secretary.
Second to BernankeDudley is developing regulations for some of the world’s biggest financial firms, such as Goldman Sachs and JPMorgan Chase & Co. (JPM), aimed at preventing a repeat of the events that brought down Lehman Brothers Holdings Inc. and the global economy.
His position makes Dudley vice chairman of the policy-setting Federal Open Market Committee, second only to Federal Reserve Chairman Ben S. Bernanke in wielding power over monetary policy. In that role, Dudley is trying to keep the economy out of a double-dip recession that could throw an additional hundreds of thousands of Americans out of work at a time of 9.1 percent unemployment.
“There’s no question this job is a major, major responsibility and really requires a diverse set of talents,”says Mark Gertler, a New York University economist who serves on a New York Fed economic advisory committee. “The president of the New York Fed carries the added responsibility of having to monitor financial markets, and that requires an extraordinary depth of knowledge. It’s perhaps second only to the chairman in terms of difficulty of the job and maybe on par.”
Pretty Ugly TreatmentDudley also has had to navigate the steady stream of attacks on him and his institution from all sides of the political spectrum. Senator Bernie Sanders, an Independent from Vermont, accused the New York Fed of being too entangled withWall Street to do its job properly. Sanders wrote a provision in the Dodd-Frank financial overhaul act to have the Government Accountability Office investigate the matter last year.
The Academy Award-winning 2010 documentary “Inside Job”depicted Dudley as a stooge of Wall Street, partly because of his Goldman roots. And Republicans are castigating Fed officials for stoking inflation following their second so-called quantitative easing program, which bought $600 billion in
U.S. Treasuries to spur economic growth.
Texas Governor and Republican presidential candidate Rick Perry said in August that additional stimulus measures from Bernanke would be “almost treacherous -- or treasonous.” He said: “We would treat him pretty ugly down in Texas.”
Visiting QueensSince October 2010, Dudley’s mission to mend relations with the public and get an on-the-ground view of local conditions has taken him to 16 cities in his district. It includes New Yorkstate, parts of New Jersey and Connecticut and all of Puerto Rico and the U.S. Virgin Islands.
On a dreary morning in March, he walked to the podium in a lower-level, windowless conference room at the Sheraton LaGuardia East Hotel in Queens, dressed in a navy suit, a blue shirt and a blue-green tie. The meeting with the Queens Chamber of Commerce made Dudley the first New York Fed chief to make an official visit to the borough in at least a decade.
After Dudley’s speech, the complaints about the Fed poured in.
One man accused it of printing money and spurring inflation, even though the core rate, which excludes food and commodities, was only 1 percent at the time. “There really is nothing to be worried about,” Dudley responded. “If we see the economy starting to overheat, we can raise the interest rate we pay on excess reserves, and those reserves will stay with us rather than be lent out into the economy.”
Dr. Pepper, Ice Cream
The man in the audience fired back: “When was the last time, sir, that you went food shopping? I was just in my supermarket the other day, and I bought paper towels and a couple food items. I couldn’t believe the price,” he says. “Us common folk, when we go food shopping, you can see the inflation that has hit our economy.”
The New York Fed president says he does shop, often to satisfy his cravings for Diet Dr Pepper and ice cream. Dudley and other Fed officials haven’t been so forthcoming about the details of the bailouts. The 2010 Dodd-Frank reforms forced the Fed to disclose the recipients of many of its emergency loans. And a lawsuit brought in 2008 by Bloomberg LP, the parent company of Bloomberg News, and won in March compelled the release of 29,000 documents and information that went beyond the Dodd-Frank requirements.
‘Trust Us’The Fed had argued in court that records held at the regional reserve banks are not subject to Freedom of Information Act requests because they’re privately financed institutions, not government agencies.
Dudley says he’s not a lawyer and can’t judge the merits of the Fed’s defense in the case. He adds that the institution should disclose information when it doesn’t damage its policies.
“In the old regime, it was sort of like: ‘Well, we did what we did. It speaks for itself, and trust us,’” Dudley says, referring to the institution he inherited. “We’ve learned a lot -- that it’s not sufficient for us to just do what we think is the right thing. We have to be much more forward leaning in terms of our communicating.”
Dudley, who goes by Bill, is suited to the task of public outreach. His grand-father was the minister of a church on Flatbush Avenue in Brooklyn, where Dudley also later lived for six years.
“He’s a down-home, easygoing, laid-back guy,” says Leon Cooperman, the former head of research at Goldman Sachs who was Dudley’s first boss when he joined the firm in 1986 as an economist. “He has no ego and is collaborative by nature.”
Dovish DudleyDudley is one of the most dovish members of the FOMC, meaning he’s more concerned with encouraging growth than thwarting inflation, says Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. Stanley says that Dudley was an enthusiastic supporter of the Fed’s two bond-purchase programs, which helped swell its balance sheet to almost $3 trillion, and that he doesn’t put a lot of stress on inflation when commenting on the economy.
Dudley, who years ago made political contributions to several Democrats, including Senator John Kerry of Massachusetts, says he rejects the dove label and considers himself a pragmatist.
Dudley has voted in support of all of Bernanke’s stimulus measures, including the FOMC’s Aug. 9 decision to maintain its benchmark interest rate at its record low near zero, at least through mid-2013. And the FOMC decided on Sept. 21 to replace some bonds in its portfolio with longer-term securities to further reduce borrowing costs.
Fed Can HelpBoth moves prompted the same three policy makers to dissent, the most since 1992. Even after its barrage of unconventional actions, the Fed has failed to bring down an unemployment rate that’s been stuck near or above 9 percent since April 2009.
Dudley says the Fed can’t fix the economy alone. Congress and the Obama administration, which have been almost paralyzed by ideological battles over taxes and spending, are now debating the president’s $447 billion jobs bill.
“We have to recognize that it’s not just about the Federal Reserve,” Dudley says. “It needs to be a collective action of all elements of government working together. We can help, but I don’t think it can be all on us.”
Dudley operates within a byzantine institution with conflicts in its structure that erupted into controversies during the financial meltdown. In passing the Federal ReserveAct of 1913 to establish a central banking system, Congress sought to balance influence over the institution between the government and banks.
Banker BoardsTo exert their sway, bankers were given a role in appointing top executives at the 12 regional reserve banks -- a conflict that wasn’t addressed until the Dodd-Frank legislation.
The Federal Reserve Act created nine-member boards for each of the reserve banks and assigned three of those seats to bankers. Banks in each district select six directors, including the three bankers. JPMorgan Chief Executive Officer Jamie Dimon,San Juan, Puerto Rico-based Popular Inc. CEO Richard Carrion and Saratoga Springs, New York-based Adirondack Trust Co. CEO Charles Wait represent banks for the New York Fed. The Board of Governors in Washington, which is appointed by the U.S. president, picks the other three members.
The six directors who aren’t bankers, including Macy’s Inc. head Terry Lundgren and Columbia University President Lee Bollinger, represent the borrowing public in areas such as commerce, industry and services.
‘Very Bizarre Structure’Regional directors, who serve three-year terms, choose the president of their bank, with the approval of the Board of Governors, as well as senior officials. They also give advice on local economic conditions.
Kevin Hassett, director of economic policy studies at the American Enterprise Institute in Washington and a former Fed economist, says the banker directors have spurred controversy over their conflicts and that the positions should be eliminated.
“It’s a very bizarre structure that arose as a political compromise a long time ago,” Hassett says. “There’s this sort of shadowy world where our financial regulators are connected with Wall Street. It’s really important that the New York Fed not be viewed as a captive of Wall Street.”
In March 2008, Dimon was caught in a conflict when JPMorgan acquired Bear Stearns Cos., says
Robert Eisenbeis, former head of research at the Federal Reserve Bank of Atlanta. The day before Bear Stearns would have had to file for bankruptcy, Dimon told Geithner, then the New York Fed president, that JPMorgan would buy the failing brokerage only if mortgage-related assets were removed, according to a July GAO report.
Dudley’s AIG StockGeithner agreed, and the Fed purchased $30 billion of Bear Stearns’s mortgage assets. A JPMorgan spokesman declined to comment.
“They had Jamie Dimon on the board of directors, who were not only picking the president but also were involved with inside knowledge about what was going on at the Fed,” says Eisenbeis, who’s now chief monetary economist at Sarasota, Florida-based Cumberland Advisors Inc. “You’ve got potentially really sensitive issues where you’re talking about trying to bail out banks.”
Dudley found himself in a possible conflict in September 2008 over American International Group Inc. (AIG) shares he owned. He joined the New York Fed in 2007 after leaving Goldman to head the markets group of the Fed. That body executes the central bank’s monetary policy by trading U.S. bonds. According to the GAO report, Dudley owned less than $15,000 of AIG stock, which he wasn’t required to sell under the central bank’s code of conduct because the insurer wasn’t supervised by the Fed.
Conflict WaiversAfter the Fed invoked its emergency-lending powers to rescue AIG in 2008, Dudley says he brought the fact that he owned the shares to the central bank’s attention.
“I basically identified that I had the holdings and said,‘I will do whatever you want me to do,’” says Dudley, who worked on the $85 billion loan to the insurer.
Geithner directed him to keep the AIG shares until a later, predetermined date because selling them at that time would also pose a conflict since he had access to inside information about the company’s dire state, the GAO said. Dudley has since sold the shares as directed by the bank.
Former New York Fed board member Stephen Friedman had a conflict that turned into a scandal. He had spent a career at Goldman Sachs and was on its board when the firm converted to a bank holding company in September 2008, putting it under Fed supervision. That made Friedman ineligible for his post as a public director at the New York Fed until he sought and received a waiver to stay on.
Questioning CredibilityHe later added to his Goldman stock as the firm benefited from Fed emergency programs -- spending $4 million to buy shares in December 2008 and January 2009. After Richard Shelby of Alabama, the ranking Republican on the Senate Banking Committee, called Friedman’s dual roles a conflict, the Goldman director resigned from the New York Fed board in May 2009, saying his service was being mischaracterized as improper.
Following the credit meltdown, Dudley and other officials have made several changes to clean up possible conflicts.
“We have to take appearance of conflict really seriously because it does affect the institution by creating questions about our credibility,” he says.
Dodd-Frank ended the practice of banker directors having a vote in electing regional presidents -- a move Dudley says he supported. After the Friedman affair, the Fed in Washington said directors who represent public borrowers can no longer have any association with banks.
No Untoward BehaviorThe New York Fed’s board went further, restricting bankers from playing any role in bank supervision or appointing its leaders in order to avoid the appearance of a conflict.
Dudley says probes by the GAO and the Financial Crisis Inquiry Commission, a panel created by
Congress, didn’t show that the Fed was rife with conflicts.
“All our activities have been looked at extraordinarily carefully,” Dudley says. “If you really look at all the body of evidence, there’s really no signs of any meaningful untoward behavior. At worst, there have been a couple of instances where there’s been an appearance of conflict, as opposed to an actual conflict.”
The GAO said the New York Fed still needs to bolster its conflict rules to reflect its expanded responsibility under Dodd-Frank. The act gave the central bank even more power, granting it authority over nonbank firms such as insurers.
‘Bit of Rebellion’Dudley says the New York Fed is working to update its code of conduct, including prohibiting its employees from having investments in the kinds of companies the Fed gained control over.
A native of Springfield, Massachusetts, and a Boston Red Sox fan, Dudley took a path to Wall Street that wasn’t completely conventional. After getting his diploma fromWilliston Northampton School in Easthampton, Massachusetts, and spending his freshman year at Columbia University in New York, he transferred to New College of Florida in Sarasota, where he sought a more avant-garde education: Students there design their own educational experience.
“I wanted just a little bit of rebellion, to break off the track I was on,” says Dudley, whose father, a lawyer, died of polio when Bill was 2 years old. “I was on the ‘I went to prep school, went to an Ivy school, got married, had 2.3 children.’”
B in MacroeconomicsAt New College, he ended up majoring in economics after realizing that a literature concentration required studying British poetry, which wasn’t his passion. Dudley was more attracted to the blend of math and analytical content that economics provided. He went on to get his doctorate in economics from the University of California, Berkeley, in 1982.
Dudley says that the one B he received was, ironically, in macroeconomics. And he adds with a smile that the grade was given to him by George Akerlof, Fed Vice Chairman Janet Yellen’s husband and a Nobel laureate in economics.
Dudley worked as a regulatory economist at JPMorgan and as an economist at the Fed in Washington before joining Goldman in 1986. Cooperman says Dudley distinguished himself when he got involved with the firm’s trading desk. In October 1998, Dudley said that Brazil’s currency, the real, was 15 percent overvalued and that there was a nearly even chance Brazil would be forced to devalue it. Three months later, the country gave up a 4 1/2-year defense of its currency, allowing it to fall by about a third in the following two months.
Earning RespectDudley said in a 2010 commencement address at New College that he thought he won Cooperman’s respect early in his career by telling him there was a mistake in a report they had co-written on tax reform that changed all the numbers. It was right before the report was to be distributed, and they had to throw out the 10,000 copies that had just been printed.
Cooperman, CEO of hedge fund Omega Advisors Inc., says Dudley’s performance brought him to the attention of Robert Rubin, who was co-chairman of Goldman Sachs in the early 1990s before becoming Treasury secretary under Democratic President Bill Clinton. Rubin took a shine to Dudley, who at age 43 was promoted to chief U.S. economist.
“Bill struck me as very bright and very thoughtful and also -- and this is not always the case, with academic economists at least -- very practical,” Rubin says. “He was able to meld academic understanding with the practicalities of markets and how business and economies actually work.”
Bogey GolferRubin says he called Dudley from time to time when he was Treasury secretary for his views on the economy. “The other thing about Bill is, if you’re Treasury Secretary, you don’t want to speak to people who are going to speak to others,”Rubin says. “He is very discreet and very honorable.”
When Dudley resigned from his post at Goldman in 2005, he joked with clients that he was leaving to lower his golf handicap. “Didn’t happen,” says Dudley, a bogey golfer. In 2007, he jumped at an offer from Geithner to lead the New York Fed’s markets group.
Dudley’s move has contributed to Goldman’s nickname, Government Sachs. So many of the firm’s employees have gone on to public posts that it has created the impression that Goldman and the government are in bed together. The links between the two are so great that Geithner had to clarify on multiple occasions to Congress and the media that he has never worked for a bank, including Goldman.
6 a.m. Pickups
“At the end of the day, policy is my life,” Dudley says.“To me, it was a tremendous opportunity to come here and do policy without any moral ambiguity.”
udley, who lives with his wife, Ann E. Darby, a retired JPMorgan banker, in Cranford, New Jersey, gets picked up for work by a bank-supplied car at 6 a.m. most mornings. He’s putting in long hours as officials move to tighten regulations -- over the objections of bankers -- to prevent another financial calamity.
“We clearly want to make it so that this never happens again,” he says.
Dudley is also a U.S. representative on the Basel Committee on Banking Supervision, a group of regulators and central bankers from 27 nations that released nonbinding rules in December requiring banks to bolster capital and reduce borrowing. The Basel Committee agreed that only common shares would constitute top-quality capital and that global firms should hold capital worth 7 percent of their risk-weighted assets. Banks deemed “too big to fail” must hold additional capital on top of the 7 percent, ranging from 1 percentage point to 2.5 points more.
Dimon ComplaintsDudley and his Fed colleagues are now writing their own rules to reconcile the Basel mandates with Dodd-Frank reforms. They’re addressing issues such as how much liquidity banks must have and how they manage risk.
Dudley is staring down his own director, JPMorgan’s Dimon, over the rules. The CEO says higher capital requirements, mortgage standards and other rules are leading to tightened lending standards.
“I have a great fear someone’s going to try to write a book in 20 years, and the book is going to talk about all the things that we did in the middle of the crisis to actually slow down recovery,” Dimon told Bernanke at a conference of bankers in Atlanta on June 7.
The New York Fed president says bankers don’t make a strong case for looser standards.
Cutting Compensation“The basic argument that higher capital requirements are going to lead to a dramatic drying up of lending that’s going to hurt the economy over the medium to longer run -- I just think that’s vastly exaggerated,” Dudley says. “They act like the only lever that they can adjust is the lending lever, but when in fact profitability can come down a little bit, compensation can fall.”
Simon Johnson, former chief economist at the International Monetary Fund who’s now a professor at Massachusetts Institute of Technology, says Fed officials should be forcing banks to hold even more capital against losses than the Basel guidelines suggest.
“They have erred on the side of agreeing too much with the banks,” Johnson says. “The New York Fed is very close to the Wall Street banks, and in many instances, its thinking is excessively and unfortunately swayed by the models and arguments of the banks.”
Dudley says regulators also need to do a better job of sharing information across borders and coming up with plans to unwind institutions.
‘Let Them Fail’“Hopefully, by doing this, one, probability of failure becomes less, and two, if failure occurs, we can actually let them fail,” he says.
The onslaught of attacks on the Fed shows no sign of slowing. In September, Representative Barney Frank, the Massachusetts Democrat who co-wrote the financial-reform legislation, renewed his push to remove regional Fed presidents from voting on the FOMC and to replace them with presidential appointees.
Dudley says he escapes the pressures of his job by reading fiction. “Matterhorn: A Novel of the Vietnam War,” by Karl Marlantes, is fantastic, he says. The author received two Purple Hearts as a Marine during the war and struggled to write and publish his book for three decades.
Dudley says he will also persevere through the thicket of protests from all quarters to stave off another financial disaster, because it’s really what he wants to do.
To contact the reporter on this story: Caroline Salas Gage in New York at firstname.lastname@example.org.
To contact the editor responsible for this story: Chris Wellisz at email@example.com