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The people nominally in charge of selecting regional Fed bank presidents outsource much of that work to a handful of virtually unknown and completely unaccountable private search firms.
The Revolving Door Project, a Prospect partner, scrutinizes the executive branch and presidential power. Follow them at therevolvingdoorproject.org.
The search for the next president of the Federal Reserve Bank of Cleveland is currently under way, with a final selection expected in January. But public officials, much less voters, have no input on this consequential decision for the future of the economy.
More than 100 years ago, elites on Wall Street and in government decided to replace an informal system in which J.P. Morgan served as the lender of last resort with a system in which Wall Street gets significant direct and indirect influence over the exercise of government authority over the financial system. Central to that framework is the public authority wielded by seemingly public but actually private corporations known as the Federal Reserve Banks. Not only are these institutions led by individuals without democratic accountability, but the people nominally in charge of selecting regional Fed bank presidents outsource much of that work to a handful of virtually unknown and completely unaccountable private search firms.
Executive headhunters control the most essential part of the hiring process—identifying suitable candidates who are qualified to oversee some of the United States’ most powerful quasi-governmental institutions. It would be naïve to believe that these Wall Street–friendly consultants have the public interest in mind when they create their short lists. Their job is to find and recycle a cadre of status quo protectors from their CV databases. The effectively privatized selection of Reserve Bank presidents exemplifies one of the many ways corporate America has usurped the electorate’s power.
Before we name these casting directors, let’s take a look at why and how they’ve been empowered to shape the pool of potential candidates in the first place.
A Brief History of the Fed’s Structure
For decades, Alexander Hamilton’s plan for a central Bank of the United States was thwarted. But a series of financial panics in the early 20th century showed the need for an industrialized economy to have some kind of monetary authority, in order to control the money supply and serve as a lender of last resort.
In the end, Woodrow Wilson’s progressive administration compromised with a banker-controlled plan from Sen. Nelson Aldrich (R-RI) to create the Federal Reserve System. This compromise, brokered by Louis Brandeis (who supported a degree of decentralization out of wariness of corporate capture of a concentrated central bank), is why the Fed is structured so peculiarly, partially private but also intended to bring a broader array of economic worldviews into monetary policymaking.
The system is made up of the Federal Reserve Board of Governors and 12 regional Reserve Banks. The seven members of the Board of Governors, presidential appointees confirmed by the Senate, set policies, guidelines, and procedures for bank inspection and monitoring the economy. This is the public, centralized portion of the Fed. On the other side, the 12 regional Reserve Banks are actually set up like private corporations, whose shareholders are the member banks in their respective regions. When a bank is chartered by any state government, it can become a member of the Federal Reserve System, which it does by purchasing stock in its district’s Reserve Bank. If banks do this, they are regulated primarily by the Fed.
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These 12 bank-owned institutions perform a number of functions that most people would probably expect to be done by the government. The Fed itself is rather cagey on this point, sometimes pointing to the fact that the Reserve Banks do not create Fed policy. However, as the Fed acknowledges in its own report on the Silicon Valley Bank failure, implementation of those policies relies heavily on the regional presidents. Bank inspectors operate out of each district’s Reserve Bank, which oversees most of their operations.
On top of regulating banks and bank holding companies in their respective districts, Reserve Banks provide important economic data, each with their own specializations. The St. Louis Fed curates data in the enormous FRED database; Atlanta offers precise GDP growth estimates; Richmond works on racial inequality; Minneapolis houses the Center for Indian Country Development; and so on. Cleveland’s particular focus is on inflation.
In addition to managing all of their Reserve Bank’s activities, regional Fed presidents serve rotating one-year terms on the Federal Open Market Committee (FOMC), the Federal Reserve’s top monetary policymaking body. (The New York Fed’s president has a permanent seat on the FOMC.) This means that these private officials play a direct role in setting interest rates, arguably the nation’s most consequential economic-policy decision, every six weeks. Currently, all seven members of the Fed’s Board of Governors are confirmed for the first time in a decade. If there are vacancies on the Board, the regional Reserve Bank presidents have even more power in setting monetary policy.
Adherence to democratic principles would require all of the senior-most central bank personnel—not just the Board of Governors—to be nominated by the U.S. president or, at least, by someone designated by them. Alas, that’s not how these regional Fed bank presidents are chosen.
How Regional Fed Bank Presidents Are Appointed
Each of the 12 Reserve Banks is governed by a nine-member board of directors, populated by three Class A directors elected by the member banks in their respective districts to represent their interests, three Class B directors elected by the same entities to represent the public (which is ridiculous!), and three Class C directors appointed by the Fed’s Board of Governors to represent the public.
To find a new Reserve Bank president, the bank’s board forms a search committee made up of Class B and C directors. After a search is conducted, the committee interviews candidates and recommends up to three finalists, all of whom are interviewed by the Board of Governors. Class B and C directors then name a president-designate, who must be approved by the Fed’s governors. The exclusion of Class A directors is a result of the Dodd-Frank Act of 2010 and theoretically limits how much sway bankers have over choosing their own regulators.
But the situation remains blurry because Class B and C directors don’t identify possible picks by themselves. Instead, they usually hire a corporate search firm to build out the candidate pool. Executive headhunters, therefore, are helping to determine which individuals are allowed to even be considered for jobs that entail setting interest rates and enacting other world-shaping financial policies, as well as more mundane but still important bank supervision responsibilities. Thanks to such outsourcing, the private sector is ultimately defining the universe of possible choices. And given that “personnel is policy,” these search firms are thus exerting considerable influence over the Federal Reserve.
The executive search industry is highly consolidated, with a small number of consulting firms dominating the Reserve Bank presidential appointment process:
- Spencer Stuart is involved in the ongoing searches for new presidents of the Cleveland and St. Louis Feds. In addition, the firm was previously retained to help pick the presidents of the Reserve Banks of Atlanta, Boston, Minneapolis, and New York (with assistance from Bridge Partners).
- Egon Zehnder played a role in the recent selection of the presidents of the Reserve Banks of Dallas and Kansas City.
- Diversified Search helped pinpoint the current presidents of the Reserve Banks of Chicago and San Francisco.
- Heidrick & Struggles assisted in choosing the current president of the Richmond Fed.
- Korn Ferry led the search for the Philadelphia Fed’s current president.
What do these “deciders” do with their awesome power? In some cases, they pick their colleagues. When former Dallas Fed President Robert Kaplan, previously a Goldman Sachs executive, was chosen for the job in 2015, he was a board member of Heidrick & Struggles, the consulting firm hired to “find” him. Kaplan resigned from the Dallas Fed in 2021 amid a scandal over making financial transactions during the COVID-19 pandemic. When looking for Kaplan’s replacement, the Reserve Bank went with Egon Zehnder instead of Heidrick & Struggles, but both outfits operate in the same elite realm.
Chicago Fed President Austan Goolsbee’s wife, Robin, is an executive at Diversified Search, the same headhunting firm that helped Austan land his new job. The Federal Reserve and Diversified Search vehemently deny that Robin, a Chicago-based managing director at the firm, was involved in the process. Even if that is true, it doesn’t change the fact that elite “talent” brokers play a heavy-handed role in the selection of Reserve Bank presidents. The Chicago Fed claims to have “every confidence in the integrity of the search process.” Integrity aside, the process lacks democratic legitimacy.
Patrick Harker was named president of the Philadelphia Fed in 2015 despite the fact that he was a sitting member of the Reserve Bank’s board of directors. As a Class B director and member of the search committee, Harker interviewed more than a dozen candidates for the job he eventually accepted. Notably, someone else had been nominated by the regional board and approved by the Fed, but this mystery candidate turned down the job and a seat on the FOMC. Then, roughly one week after Harker put his own name forward and recused himself from the process, his colleagues unanimously appointed him president.
All 12 Reserve Bank presidents make north of $330,000 per year—considerably more than the chair and other members of the Federal Reserve Board, whose annual salaries have been capped by Congress at around $200,000. These salaries would be extremely attractive to individuals with labor or academic backgrounds. That some top candidates have declined these prestigious positions may suggest that search firms are recommending corporate executives, for whom $330,000 or more per year is not enough money.
There are even more examples of Reserve Bank board members acting in self-serving ways. In 2018, for instance, then-Honeywell CEO David Cote abruptly resigned from his position as a Class B director at the New York Fed before the search to replace the institution’s outgoing president, Bill Dudley, had formally concluded. The New York Fed said that Cote and his fellow search committee members had already settled on former San Francisco Fed President John Williams to be Dudley’s successor prior to Cote’s resignation announcement. The reason Cote quit? To take a job advising Goldman Sachs as it embarked on a massive mergers and acquisitions binge. As Jordan Haedtler, then-manager of the Center for Popular Democracy’s Fed Up campaign, explained at the time, this means that “Cote was simultaneously negotiating a new gig at Goldman Sachs while selecting one of Goldman’s top regulators.”
The Selection Process Must Be Democratized
Amazingly, this process has been reformed, albeit to a small degree. Thanks to Dodd-Frank, Class A directors are excluded from the Reserve Bank presidential appointment process (although Class B directors are still involved, despite also being elected by member banks subject to Fed regulation). Prior to Dodd-Frank, JPMorgan Chase CEO Jamie Dimon, who served as Class A director on the New York Fed board from 2007 to 2012, was involved in the search that put Dudley, a Goldman Sachs alum, in power in 2009. To underscore the limits of the reform, however, it’s important to note that then-General Electric CEO Jeff Immelt was a Class B director at the time, while Stephen Friedman was a Class C director who chaired the New York Fed board and its presidential search committee even as he simultaneously sat on Goldman Sachs’s board of directors. Both Immelt and Friedman would still be allowed to appoint a new president today.
In 2003, when Tim Geithner was appointed president of the New York Fed, the chair of the Reserve Bank’s board of directors and its search committee was Peter Peterson. Among other things, Peterson was a co-founder of Blackstone, the pioneering private equity fund whose vulturous investors capitalized on the post-crash foreclosure wave. The Peterson-led search panel was advised by a veritable who’s who of economic destruction, including Paul Volcker—the former Fed chair whose interest rate hikes weakened the working class and ushered in the neoliberal era—as well as Robert Rubin and Larry Summers, both of whom helped transform Reagan’s model of upward redistribution into bipartisan common sense during the Clinton years.
In 2016, Rep. Bill Huizenga (R-MI) called for repealing the Dodd-Frank reform that removed Class A directors from the process. By contrast, after former Silicon Valley Bank CEO Greg Becker resigned from his yearslong post on the San Francisco Fed’s board of directors as the bank he ran collapsed in March 2023, Sen. Bernie Sanders (I-VT) reintroduced legislation that would require all members of every Reserve Bank’s board of directors to be designated by the Fed’s Board of Governors, and preclude any bank employees from being chosen.
More recently, in the wake of a poorly publicized virtual town hall event on the Cleveland Fed presidential search, Senate Banking Committee members Sherrod Brown (D-OH) and John Fetterman (D-PA)—both residents of the Federal Reserve’s Fourth District—sent a letter urging the search committee to give people throughout the region meaningful avenues for input. In addition, the lawmakers implored the committee to prioritize not only demographic diversity but also “diversity of thought” in its search. “The Federal Reserve system continues to foster a groupthink culture,” they wrote, noting that “more than three fourths of regional bank directors come from a banking or corporate business background.”
Better public engagement is sorely needed, and so are candidates who prioritize labor and civil rights. But additional community meetings—even well-publicized and highly accessible ones—won’t mean much as long as the participants allowed on stage have already been vetted by private consulting firms whose raison d’être does not align with advancing a pro-worker agenda. The Reserve Bank presidential appointment process is opaque and yields regressive outcomes because it has been privatized. To make the process transparent and to increase the odds of progressive results, it must be democratized. That means corporate interests can no longer be permitted to choose who is in contention for what are in effect public positions affecting millions of people nationwide.
