NEW YORK -- A director of the Federal Reserve Bank of New York, who is supposed to represent the public, has provoked criticism that she has a conflict of interest as she defends Wall Street against the state's top law enforcer.
Kathryn Wylde, deputy chair of the New York Fed's board, challenged state Attorney General Eric Schneiderman's opposition to a proposed $8.5 billion settlement between Bank of America and a group of investors -- leaping to the defense of the financial industry -- according to remarks quoted Monday in The New York Times.
Wylde's day job is president and chief executive of the Partnership for New York City, a nonprofit that is funded by dues from its partner companies, which include the very banks involved in the talks to settle claims over hundreds of billions of dollars in soured home loans. Her apparent sympathy toward big banks compromises Wylde's ability to represent the public as a director of a bank regulator, said research analyst Christopher Whalen, who, along with analyst Barry Ritholtz, called for Wylde to resign.
"I'm just appalled," said Whalen, who is managing director of Institutional Risk Analytics. "She is a public director of a Federal Reserve Bank, and she's not supposed to behave this way. She is not an advocate for the industry."
"If she wants to be an advocate for the big banks," he continued, "then she ought to step down."
Wylde, whose duty at the Fed is explicitly "to represent the public," said in an email that she is not a bank regulator, that she does not have a conflict of interest and that her role as a New York Fed director is "to provide input to the Fed on regional economic conditions." Despite the fact that the New York Fed itself regulates banks, its board does not, Wylde explained.
She noted that the companies involved in the mortgage settlement talks are just a few of the "several hundred" partner companies of the Partnership for New York City, adding, "They leave their institutional identities at the door and work with us on challenges facing the city and state." (Wylde has blogged for The Huffington Post.)
"Unlike Detroit, where the industry is cars, and Texas, where it is oil, in [New York State] the primary industry is finance," Wylde said in an email. "The people of New York all share in the suffering due to lost tax revenues and reduced economic activity when our major financial institutions are weakened. That is why support for these institutions, insuring balance in the discussion, is very much in the public interest in NY."
Wylde's compensation from the Partnership, whose partner companies include institutions that are regulated by the Fed, was more than $466,000 in 2009, according to a filing with the Internal Revenue Service.
Rules on the New York Fed's website state that directors like Wylde may not "be officers, directors, or employees of any private sector bank or bank holding company."
"The purpose of these rules is to ensure that Reserve Bank directors will be drawn from diverse backgrounds and that various viewpoints will be brought to bear," the rules say.
A spokesman for the New York Fed declined to comment.
Schneiderman, the New York attorney general, moved to block the Bank of America mortgage settlement earlier this month, claiming in court documents that another bank, acting as a trustee representing the investors, committed fraud.
The trustee, Bank of New York Mellon, knew the mortgage-backed securities created by Countrywide Financial, the lender that BofA acquired in 2008, were defective, but it essentially looked the other way and didn't inform investors, Schneiderman claimed. The deception that investors say was committed by Countrywide is only part of the story, according to the attorney general's court filing.
Schneiderman asked a judge to reject a settlement that BofA had reached with BNY Mellon this summer. The $8.5 billion prize would amount to less than 4 percent of the roughly $220 billion of unpaid principal that's still outstanding on the securities, according to a recent Bank of America filing with the Securities and Exchange Commission.
The attorney general's court filing also noted that the job description of the state's chief law enforcer includes "protecting the economic health and well-being of all investors who reside or transact business within the State of New York."
Schneiderman's intervention surprised many in the financial community, who had expected the settlement to go through.
BNY Mellon called Schneiderman's allegations "outrageous, baseless, unsupported by fact and law." But for further comment at the time, the bank referred reporters to none other than Wylde. On Monday, a spokesperson for BNY Mellon declined to comment on why the bank did so.
A couple weeks later, Wylde encountered Schneiderman at a memorial service, The New York Times reported Monday.
Wylde told the attorney general, "It is of concern to the industry that instead of trying to facilitate resolving these issues, you seem to be throwing a wrench into it. Wall Street is our Main Street -- love 'em or hate 'em. They are important and we have to make sure we are doing everything we can to support them unless they are doing something indefensible."
A spokesman for Schneiderman declined to comment on Wylde's remarks. In response to the Times report, Ritholtz, who is chief executive of the quantitative research firm Fusion IQ, wrote a blog post calling for Wylde to resign.
"I do not know if Ms. Wylde understands what her proper role should be, but clearly she is somewhat confused," Ritholtz wrote. "She appears to be far more interested in representing the banks than the public."
Wylde disputed that characterization.
"The Fed really had nothing to do with any of this," she said in an email. "I jumped to the defense of an important NY employer and that is really the story."
The partner companies of the Partnership for New York City include BofA, BNY Mellon and BlackRock, which is one of the institutional investors involved in the mortgage securities case. The New York Fed is also one of the investors.
Other partner companies include Citigroup, Goldman Sachs and JPMorgan Chase -- all of which are regulated by the New York Fed.
In May of 2009, a director of the New York Fed, Stephen Friedman, resigned from that board because of an appearance of a conflict of interest.
Friedman, who was also a director of Goldman Sachs, purchased shares in the investment bank even after a technical change in September 2008 placed the company under the Fed's regulation. Friedman had gotten a waiver from the Fed that allowed him to own Goldman shares.
But the existence of the waiver apparently wasn't enough to ease the public's concern. Alabama Sen. Richard Shelby, the top Republican on the Senate Banking Committee, called the stock purchases "deeply disturbing," according to a Wall Street Journal report at the time.
"I have been in compliance with the rules," Friedman said in a resignation letter, but "my public service motivated continuation on the Reserve Bank Board is being mischaracterized as improper."
"The Federal Reserve System has important work to do," he said, "and does not need this distraction."
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William Alden is the Wall Street reporter for The Huffington Post. Email him at email@example.com or give him a call at 212-402-7004.
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