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Most of the media reports and blogs fully equated the Fed with the government, often using the terms interchangeably, leading some to wonder why the Fed paid the banks dollar for dollar on their counterparty claims. But the Federal Reserve is not quite the government, and its constituency is therefore not the voter or taxpayer -- unless those taxpayers happen to be banks. Few Americans understand that the Fed is a central bank, or more to the point, that it does what central banks are supposed to do. The role of a central bank is to oversee monetary policy and maintain stability in the financial system. To avoid political meddling from Congress or the White House, the creators of the Federal Reserve deferred upon it a great deal of independence, leaving much of the power in the hands of the banks that are members of the system's 12 regional Federal Reserve Banks. Admittedly, it is easy to forget about independence since the chairman of the Federal Reserve and its Board of Governors are appointed by the president and confirmed by the Senate much like a Cabinet member of the executive branch. Meanwhile, the Federal Reserve's 12 regional banks are not only owned by the bank holding companies operating in the branch's district, but their boards represent both banking interests and commercial interests from across the region -- no politicians need apply. Both the Board of Governors and regional banks have representatives on the Federal Open Market Committee, which is responsible for overseeing monetary policy -- again politicians are not part of the equation. The unusual structure makes the Fed's position a cloudy one, and it is easy to see how it might cause headaches to outside observers. Nonetheless, the Fed is not the government, but a quasi-government institution who's true constituents and shareholders are the bank holding companies and to a lesser extent the customers of those banks -- not taxpayers. Later-day economic research has vindicated the founders by showing a central bank independent of political interference leads to lower inflation. However, independence also guarantees that when faced with a dilemma like the one facing the insolvent AIG, the Fed will always side with bankers. Such a circumstance was borne out in 1998 when the collapse of hedge fund Long-Term Capital Management threatened banks. The Federal Reserve stepped in to help its member banks who stood to lose a great deal of money if LTCM imploded. With this historical context in mind, why is it hard to believe the Fed would demand AIG pay the banks in full for its counterparty claims? - Matthew Wurtzel Also see: AIG, Geithner, CDOs for 100 cents on the dollar
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There is a great deal of chatter about the Federal Reserve's role in settling with American International Group Inc.'s (NYSE: AIG) collateralized debt obligation counterparties last year. Dealscape 
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