The Government Accountability Office (GAO) finished its second audit of the Federal Reserve System and came out with a 127-page report that outlines, among other issues, the huge and complex conflicts of interests that arose when the Fed decided who got what during the multi-trillion dollar bailout mania between 2007 and 2009 (timeline of bailout mania; Senator Bernie Sanders’ 4-page Report on the GAO Audit).

Speaking of conflicts of interest: the GAO audit was authorized by the Dodd-Frank financial reform act—whose co-sponsor Barney Frank (D) is scheduled to attend a Wall Street fundraiser in New York tonight, according to Politico. Last June, Frank attended a Wall Street fundraiser organized by the Securities Industry and Financial Markets Association, which lobbies against financial reforms. Money is important, after all. Even for President Obama. He raised more money from Wall Street than did all GOP presidential candidates combined, according to a Washington Post analysis.

So where were we? Ah yes, conflicts of interest, favoritism, and lots of money for some—but not all:

The GAO identified 18 former and current members of the Federal Reserve’s board affiliated with banks and companies that received emergency loans from the Federal Reserve during the financial crisis….

For the heck of it, let’s dive into a specific example.

In January 2008 when the financial crisis was already in full swing, Goldman Sachs board member and shareholder Stephen Friedman joined the Federal Reserve Bank of New York as a Class C director. At the time, Goldman Sachs was an investment bank, and thus not regulated by the Federal Reserve.

But then Lehman Brothers began to totter. Its CEO, Richard Fuld, a Class B director at the New York Fed, met with Timothy Geithner, president of the New York Fed, and with Friedman, who was then chairman of the New York Fed (and still sat on the board of Goldman Sachs). Fuld needed help. However, due to potential “reputational risks,” Geithner and Friedman turned down his request. Further, Federal Reserve Board practice sees to it that directors resign when their financial institutions get in trouble. So, instead of getting bailed out, Fuld had to resign. And on September 15, Lehman filed for bankruptcy.

September 20, Goldman Sachs, now tottering too, submitted an application to become a bank holding company. With Friedman being chairman of the New York Fed, the application was approved overnight. That did a number of things, among them: It gave the firm access to the Fed’s unlimited resources; and Friedman became ineligible to remain a Class C director and should have resigned. But he didn’t.

Then on September 23, there was a public demonstration of just how intertwined the financial elite around the Fed is. Friedman’s long-time friend and client Warren Buffet announced Berkshire Hathaway’s investment in Goldman Sachs. During an interview with CNBC, Buffet said that he wouldn’t have made the move, had he not been certain that Goldman Sachs would get bailed out. And he got a special deal: $5 billion in preferred stock with a 10% annual dividend plus warrants to buy $5 billion in common stock at a strike price of $115. When the announcement was made after hours, GS jumped to $134.75. The warrants were already in the money (today, GS closed at $100.86).

In October that year, the New York Fed asked for a waiver that would allow Friedman to remain a Class C director while being a board member and stockholder of Goldman Sachs, the very firm he was now regulating and bailing out. On January 21, 2009, the waiver was approved though not publicly disclosed. But throughout that time, Friedman, as chairman of the New York Fed, purchased more Goldman Sachs stock, knowing what bailout instruments were being planned and implemented, and which firm got how much and under what conditions.

Among the 18 people identified in the GAO report was Jeffrey Immelt, the CEO of General Electric, and a director on the board of the New York Fed. He was involved in establishing the Commercial Paper Funding Facility that later handed GE $16 billion in bailout funds (he is now Chairman of the Council on Jobs and Competitiveness in the Obama administration). Another was Jamie Dimon, the CEO of JP Morgan Chase, and a director at the New York Fed. And we can assume that there were many more that the audit didn’t identify.

These audits are good. And they’re necessary. So we’re grateful that Senator Bernie Sanders sponsored the amendment to Frank-Dodd that authorized them. But they’re only a feeble first step. Courageous congressional action to clean up the financial cesspool that is bogging down the economy should be next. But Congress is hooked on Wall Street fund raisers. And it is hooked on the Fed’s printing press to monetize the gigantic budget deficits. So there isn’t much hope for serious reform.

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.