In September, 1988, Cain became mortgaged to Citibank for everything he owned. In December, 1988, The Federal Reserve Bank in Kansas City appointed Cain to be a director and to set monetary policy for banks, including the bank that his entire net worth was mortgaged to. How unethical is that? Is it legal?

According to the Federal Reserve, “The Federal Reserve implements monetary policy through its control over the federal funds rate—the rate at which depository institutions trade balances at the Federal Reserve .”

Herman Cain was appointed to the Kansas City Board of the Federal Reserve on December 29, 1988. This is the announcement of his appointment from the Omaha World Herald :

Herman Cain , president and chief executive officer of Godfather’s Pizza Inc. of Omaha, has been named a director of the Omaha branch of the Federal Reserve Bank of Kansas City.

He succeeds Janice D. Stoney, president of the consumer division of U S West Communications in Omaha.

A bank spokesman said Mrs. Stoney, who is completing her second term on the board, resigned to give more attention to her obligations with U S West.

The five directors of the Omaha branch are appointed for two – year terms. They usually are reappointed twice.

Cain did not have a background in economics or banking. He had a BA in mathematics and an MA in Computer Science. His only management experience was less than 3 years as manager of some 400 Burger Kings and less than 3 years as manager of around 600 Godfather’s Restaurants. This hardly qualified him to oversee policies for the banking industry.

Three Months before his appointment on September 20, 1988, Cain had been given a loan of approximately $30,000,000 dollars by Citibank to buy Godfather’s Pizzas. He was in debt to Citibank for his entire net worth.

Cain described how much he owed CitiBank in an interview in 1992:

When the buyout group was seeking financing, he said, he talked with bankers who wanted to know how much money the managers could raise toward the purchase.

“When we bought Godfather’s Pizza, we believed in the company, and we took a real big chance when we signed that mile – high stack of documents,” he said, “signing away our lives, all of our cars, my house. They even wanted the golf clubs listed as assets.

“When they asked for the golf clubs, I knew they were serious.”

Cain said he asked his banker why the loan went through even though the managers couldn’t raise the usual 20 percent to 25 percent of the purchase price.

“He said, ‘As long as we’ve got all of your money, we’re happy,’ ” Cain said. “Then I understood.”

Rule No. 2, the banker told Cain: “Before we lose a dollar, you will lose everything .”

When the Federal Reserve Bank of Kansas City appointed Herman Cain to its Board of Directors it must have known that Cain was in debt for every penny he owned, including his golf clubs, to Citibank. How could someone in debt to a bank for everything he owned be objective in setting monetary policy for banks, including the bank that had just given him a $30,000,000 loan?

Cain admits that the loan was unusual in that he did not put up the usual 20-25% needed for the loan. Is it possible that Citibank got something in exchange for the loan more important than this down payment? Is it possible that Citibank got someone on the Federal Board who was totally unqualified, but seriously in debt to them, and would advocate whatever policies they wished?

It is clear to me that the appointment of Cain and his acceptance was totally unethical.  You can not give objective monetary policy advice in the best interests of all the people, if your direct financial interests will be drastically affected by the policies you set. My question for lawyers and others is “Was it illegal?” The appointment of an unqualified person (no economic or banking background) to a board to oversee banking policy immediately after that person has received a massive loan under unusual circumstances seems a criminal activity to me.

1. The Federal Reserve System Purposes and Functions, Chapter 3, “The Implementation of Monetary Policy,” pg. 27. http://www.federalreserve.gov/pf/pdf/pf_complete.pdf (viewed Oct. 23, 2011)
2/ Omaha World-Herald (NE) – Thursday, December 29, 1988, “Cain Named to Fed Board,” http://iw.newsbank.com/iw-search/we/InfoWeb?p_product=AWNB&p_theme=aggregated5&p_action=doc&p_docid=12E0AEA31C6D9A68&p_docnum=9&p_queryname=7 (viewed Oct 23, 2011).
3. Omaha World-Herald (NE) – Friday, October 2, 1992. “Focus, Not Expansion, Is Key, Pizza Chain Boss Says” Author: Steve Jordon, World – Herald Business Editor

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