An audit of the Federal Reserve released Wednesday took the system's 12 regional banks to task for the opacity of their board hiring practices and their conflict of interest policies and suggested some mild remedies to address the shortcomings.

Despite the gentle tone of the report, one of the Fed's fiercest critics jumped on the audit's conclusions as evidence of a way-too-cozy relationship between the system, which also includes the central bank in Washington, and the country's largest private financial institutions. That cozy relationship has led to monetary policies that place stability of the country's largest financial institutions over employment and enabled industry executives, who also sit on the boards of the reserve banks, to influence credit terms from which their companies can access government-backed lending, the system's critics say.

"The most powerful entity in the United States is riddled with conflicts of interest," Sen. Bernie Sanders, Vermont independent, said after reviewing the Government Accountability Office's audit.

The study was required by a Sanders-authored amendment included in the 2010 Dodd-Frank financial reform.

Sanders said the GAO detailed "instance after instance" of top executives of private institutions using their influence as Federal Reserve directors to benefit their firms. "Clearly it is unacceptable for so few people to wield so much unchecked power," Sanders said. "Not only do they run the banks, they run the institutions that regulate the banks."

Sanders said he will work with leading economists to develop legislation to restructure the Fed and bar the banking industry from picking Fed directors. "This is exactly the kind of outrageous behavior by the big banks and Wall Street that is infuriating so many Americans," Sanders said.

The audit may help another lawmaker, Massachusetts Rep. Barney Frank, the ranking Democrat on the House Financial Services Committee, win some support for legislation that would bar the regional Federal Reserve Bank presidents from voting on decisions by the open market committee, which sets monetary policy for the country.

The GAO listed several instances during the recent financial crisis in which senior executives of financial firms were serving on the boards of the regional Fed banks and were in a position to influence emergency and other extensions of credit their firms got from the Federal Reserve System. The report did not identify the individuals by name but the examples make it clear who they are.

Sanders highlighted several instances as particularly damning evidence of the sweetheart relationship between the Fed system and the banks it is supposed to regulate.

He cited the example of Stephen Friedman, chairman of the New York Fed in 2008, who approved an application from Goldman Sachs Group Inc. to become a bank holding company, giving it access to discount-rate Fed loans. At that same time, Friedman was a member of the Goldman Sachs board and owned Goldman stock. Although the Fed's rules prohibited him from owning the shares, he received a waiver that was not made public. After receiving the waiver, he continued to buy Goldman stock through January 2009. The additional purchases were not known to the Fed, according to the GAO.

Sanders also noted that the GAO singled out General Electric Co. chief executive Jeffrey Immelt, who was a director at the New York Fed while the bank was consulting with GE on the creation of the commercial paper funding facility, which subsequently provided $16 billion in emergency financing to GE.

J.P. Morgan Chase & Co. chief executive Jamie Dimon, the GAO noted, also served on the board of the New York Fed when his bank received emergency loans from the Fed, and J.P. Morgan was used by the Fed as a clearing bank for the Fed's emergency lending programs. The Fed also lent J.P. Morgan $29 billion in financing to acquire Bear Stearns. During that time, the Fed also provided J.P. Morgan with an 18-month exemption from risk-based leverage and capital requirements.

Although Sanders claimed the findings verified his long-standing criticism of the Fed system's governance practice, the GAO was less critical. It found that directors play little role in regulation and supervision of member banks, but that the banks' policies on waivers and other governance policies need to be more transparent. The GAO made four recommendations: broaden the pools of director candidates, clearly document the roles of directors, adopt a process for regional banks to grant rule waivers, and make key governance documents public.

The Federal Reserve Board in Washington said it agreed with the GAO's recommendations and would work to implement them.