How The Federal Reserve's Own Culture Lets Wall Street Get Away With Anything

from the this-american-life-indeed dept

The idea that there's so-called "regulatory capture" of the Federal Reserve by the very Wall Street bankers they're supposed to regulate isn't one that's particularly surprising to anyone. It's been obvious for quite some time, but everyone in power has generally looked the other way about it. ProPublica and This American Life teamed up this week to reveal the the secret recordings of Carmen Segarra, a bank examiner of the Fed, who was supposed to be watching over Goldman Sachs. When she realized what was truly going on (basically, her bosses keep suggesting she tone down her criticism and concerns of Goldman), she bought a hidden recorder and started recording. The resulting story is astounding and incredibly revealing -- even if you already assumed much of it was true. Michael Lewis -- who's been reporting on Wall Street for decades -- describes the recordings as the "Ray Rice video for the financial sector", which may be a slight exaggeration, but the story is still quite telling.

The report starts off by detailing how the Fed conducted a (for internal use only) study on how it totally missed the financial meltdown of 2008. And the answer won't surprise you, even if those close to the system claim they were surprised:
The most daunting obstacle the New York Fed faced in overseeing the nation's biggest financial institutions was its own culture. The New York Fed had become too risk-averse and deferential to the banks it supervised. Its examiners feared contradicting bosses, who too often forced their findings into an institutional consensus that watered down much of what they did.
From there, the story moves on to Segarra, who had been hired to be a senior examiner watching over Goldman Sachs. She actually tried to do her job, and for that was fired after just seven months on the job. She had discovered serious conflict of interest problems on certain deals, and then (on top of that) discovered that Goldman Sachs had no official "conflict of interest policy" that conformed with what was required by the Fed. When she wrote up a report on this, her boss insisted that she take out the claim that there was no policy, despite it being true. She was soon fired -- and then sued the Fed (and lost).

However, this desire to whitewash embarrassment seems endemic at the Fed. It happened to the guy who wrote that report detailing the Fed's cultural problems:
One New York Fed employee, a supervisor, described his experience in terms of "regulatory capture," the phrase commonly used to describe a situation where banks co-opt regulators. Beim included the remark in a footnote. "Within three weeks on the job, I saw the capture set in," the manager stated.

Confronted with the quotation, senior officers at the Fed asked the professor to remove it from the report, according to Beim. "They didn't give an argument," Beim said in an interview. "They were embarrassed." He refused to change it.
The report goes on to detail how quickly the Fed seemed to take orders from Goldman Sachs. There was a situation in which a Fed examiner, Michael Silva, expressed concerns about a probably-legal, but still ethically-questionable, deal that Goldman was involved in -- effectively moving around some shares in a Spanish bank to make the bank look fiscally more sound than it really was. But, expressing concern about the deal apparently wasn't allowed:
Shortly after the Santander transaction closed, Segarra notified her own risk-specialist bosses that Silva was concerned. They told her to look into the deal. She met with Silva to tell him the news, but he had some of his own. The general counsel of the New York Fed had "reined me in," he told Segarra. Silva did not refer by name to Tom Baxter, the New York Fed's general counsel, but said: "I was all fired up, and he doesn't want me getting the Fed to assert powers it doesn't have."

This conversation occurred the day before the New York Fed team met with Goldman officials to learn about the inner workings of the deal.
In the audio version on This American Life, you can hear the incredible sequence in which Silva "fires up" his team to go confront Goldman about a specific problem with the deal (the other bank had required to get the Fed to sign off and say there were "no objections" and Goldman hadn't done so). However, then there's the recording of the meeting that happens right after Silva talks about going in and asking this important question -- and Silva doesn't get around to asking it until an hour into the meeting, and does so incredibly meekly, basically backing off the question before he's even finished answering it, handing Goldman an out.

There's also audio of other Fed employees talking about how they should almost apologize to Goldman for all their questions, out of fear that Goldman (1) will think they're being "critical" of the bank and (2) won't share information on future deals (even though they're legally required to do so).

It's classic regulatory capture. The Fed guys -- who literally work in the building with Goldman -- want the Goldman guys to like them.

There's a lot more in the report, leading to a point in which Segarra is basically told to not be so good at doing her examiner job, but to instead build more relationships. The Fed employee doing the scolding, Segarra's supervisor who used to have her job, points out that she's upset some people with her brusque language, her "sharper elbows" and the fact that she was "breaking eggs." Segarra points out that she's doing her job and, furthermore, doing a "good job" as well:
"I'm here to change the definition of what a good job is," Kim said. "There are two parts it: Actually producing the results, which I think you're very capable of producing the results. But also be mindful of enfolding people and defusing situations, making sure that people feel like they're heard and respected."
In other words, don't do your job quite so well, because you're pissing off people at Goldman Sachs. That eventually led to the fight over the conflict of interest policy. After investigating it for a while, having Goldman officials and Michael Silva directly admit that there was no real policy, suddenly Silva tells her she can't actually say that in the report she's writing up. This is because folks at Goldman got upset about it, pointing to a generally vague policy statement on conflicts of interests (which doesn't come close to actually being a policy), and insisted that they had a policy.
"You have to come off the view that Goldman doesn't have any kind of conflict-of- interest policy," are the first words Silva says to her. Fed officials didn't believe her conclusion — that Goldman lacked a policy — was "credible."

Segarra tells him she has been writing bank compliance policies for a living since she graduated from law school in 1998. She has asked Goldman for the bank's policies, and what they provided did not comply with Fed guidance.

"I'm going to lose this entire case," Silva says, "because of your fixation on whether they do or don't have a policy. Why can't we just say they have basic pieces of a policy but they have to dramatically improve it?"
Later in the conversation, Silva says that he "didn't get taken seriously" when he challenged higher-ups in the past over that shady banking deal, and thus Segarra should just give in to the higher-ups demands. A week later, she was fired.

There's also this story, which Lewis summarizes:
In meetings, Fed employees would defer to the Goldman people; if one of the Goldman people said something revealing or even alarming, the other Fed employees in the meeting would either ignore or downplay it. For instance, in one meeting a Goldman employee expressed the view that "once clients are wealthy enough certain consumer laws don't apply to them." After that meeting, Segarra turned to a fellow Fed regulator and said how surprised she was by that statement -- to which the regulator replied, "You didn't hear that."
In the actual This American Life episode, the story is even more damning. There were other regulators (not from the Fed) there as well, who all heard it too. And they were all talking about (something that was confirmed by others there) and the other Fed employee insisted that Goldman must have been joking and no one should pay attention to it.

The end result of all this: the banks run the show.

I actually didn't find the full report to be quite as damning as Lewis does. Some of the issues raised by Segarra do appear to be slightly overstated, and there do seem to be reasonable explanations for some of the things she found questionable. But it doesn't change the overall issue, which is that the banks effectively control the regulator, not through direct intimidation (or at least not in ways that are directly evident in this report), but because the Fed itself seems unwilling to ever actually rock the boat and make sure that Goldman is held to account.

Now, I'm among those who are concerned about situations involving over-regulation and government interference where it's not necessary. But we should also be concerned about companies that are simply too powerful, and are able to engage in activities that abuse market power to harm the public -- and to engage regulatory capture to rubber stamp them. This episode shows how that's apparently the norm on Wall Street.
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Filed Under: carmen segarra, federal reserve, michael silva, regulations, regulatory capture, wall street
Companies: goldman sachs


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  • identicon
    Anonymous Coward, 26 Sep 2014 @ 11:37am

    conspiracy theory becomes conspiracy fact

    1. You sort of knew that the regulators were more or less controlled by the banks. Now you know.

    2. The only reason you know is that one woman, Carmen Segarra, has been brave enough to fight the system. She has paid a great price to inform us all of the obvious. She has lost her job, undermined her career, and will no doubt also endure a lifetime of lawsuits and slander.

    So what are you going to do about it? At this moment the Fed is probably telling itself that, like the financial crisis, this, too, will blow over. It shouldn't.


    the fed owns the banks, it creates their product out of thin air and lends it at usurous rates to we the people to enslave us through boom and bust it also creates. it is a far cry from the honest money system the patriots created for us in the constitution. it is a rothschilds creation and nothing more, that took 100 years to steal america and enslave its people.

    reply to this | link to this | view in chronology ]

    • identicon
      Anonymous Coward, 26 Sep 2014 @ 1:19pm

      Re: conspiracy theory becomes conspiracy fact

      You seem to know your history. Now, how many guesses do you think you need to figure out if the solution to this problem could be had without blood shed?

      The rich never part willingly and are able to hire a massive army compared to us poor folk which server them one way or another. The American electorate is simply too stupid to remove themselves from the left vs right rut we are in. Both sides are destroying the nation in the throws of partisan politics.

      reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 26 Sep 2014 @ 11:42am

    There's no problem the Fed can't print their way out of.

    reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 26 Sep 2014 @ 11:47am

    Just listened to the episode. The most damning part in my eyes was when her boss berated her for an hour trying to get her to change her findings about whether or not Goldman had a Conflict of Interest policy. And when she refused to relent, she was fired a week later.

    This is it folks. Time to burn the system to the ground and rebuild it. A purifying fire is required at the point, because the system is beyond repair.

    reply to this | link to this | view in chronology ]

    • identicon
      Anonymous Coward, 26 Sep 2014 @ 11:56am

      Re:

      One of the main issues with burning it to the ground and starting over, is that it doesn't just end with the financial sector. Take a gander at the rest of the government and it pretty much looks the same.

      The Obama administration has had no interest in upsetting the apple cart. The SEC has been berated for allowing banks to not admit fault while paying small fines in comparison to the enrichment they received.

      With no meaningful law changes to how banks are regulated, everything is in place for a replay of the economic crash. The only thing that will be different will be the cause, the results will be the same.

      reply to this | link to this | view in chronology ]

      • identicon
        Anonymous Coward, 26 Sep 2014 @ 12:15pm

        Re: Re:

        "The Obama administration has had no interest in upsetting the apple cart. The SEC has been berated for allowing banks to not admit fault while paying small fines in comparison to the enrichment they received.

        With no meaningful law changes to how banks are regulated, everything is in place for a replay of the economic crash. The only thing that will be different will be the cause, the results will be the same."

        Agreed, which is why i advocate burning it (all) to the ground.

        When i said the system was beyond repair, i was implying that it couldn't be repaired because the entire structure has interlinked dependencies, so you can't just take out some bad actors and call it a day or regulate it in any meaningful way. Any attempt to do either will trigger others in government to stop corrective action in its tracks. The vines are too numerous and too entangled at this point to make any meaningful changes.

        It can't be fixed or untangled, thus it must be burned to the ground and rebuilt.

        reply to this | link to this | view in chronology ]

        • identicon
          Anonymous Coward, 26 Sep 2014 @ 1:23pm

          Re: Re: Re:

          This requires blood.

          The tree of liberty must be refreshed from time to time by the blood of tyrants AND patriots.

          We just so happen to be fresh out of the latter. You will nary find a coward here willing to die for this.

          reply to this | link to this | view in chronology ]

          • icon
            Anonymous Howard (profile), 30 Sep 2014 @ 3:21am

            Re: Re: Re: Re:

            1. Crowsource the list of people in charge of the corruption.
            2. Crowdfund hitmen.
            3. Rebuild the system without the "ultrarich" element present.
            4. Profit!

            reply to this | link to this | view in chronology ]

      • icon
        Padpaw (profile), 26 Sep 2014 @ 1:51pm

        Re: Re:

        were in the middle of a another bad growing season, several cities still have not recovered from the natural disasters they suffered as the politicos stole the funds for themselves. Food sizes are down while prices go up, less jobs now than there were before the last crash, The police are on a full scale war against any citizen that looks at them the wrong way.


        When there is another crash America will be lucky to survive As a country called America. Even luckier if your not ruled by a dictator for life at that point.

        reply to this | link to this | view in chronology ]

  • identicon
    Cranios, 26 Sep 2014 @ 11:48am

    No mystery as to why this is so...

    ...what the Fed employees really mean to say was, "if you get the GS people pissed off at me, they may not offer me a lucrative job when I resign from the Fed."

    reply to this | link to this | view in chronology ]

  • identicon
    Andyroo, 26 Sep 2014 @ 11:52am

    Depression

    Banks are going to bring a depression unlike any seen before and they and their wealth supporters need to be taken out back and shot for doing what they have been doing, the theft from the country of cash is beyond crazy and the fact that the government helps support hiding it and not punishing those responsible should mean every one of them be jailed or taken out back and shot.
    It would actually be a great thing if the dollar was refused as a currency and that a new currency be started and the offshore hoarders suddenly had massive bank accounts worth nothing.

    reply to this | link to this | view in chronology ]

    • icon
      Daniel Joseph Calvanese (profile), 26 Sep 2014 @ 2:35pm

      Re: Depression

      "It would actually be a great thing if the dollar was refused as a currency and that a new currency be started and the offshore hoarders suddenly had massive bank accounts worth nothing."

      --The USG destroys countries that try to do this (Iraq & Libya).

      reply to this | link to this | view in chronology ]

    • identicon
      Anonymous Coward, 26 Sep 2014 @ 4:31pm

      Re: Depression

      Actually the dollar being the standard valuta is the biggest problem in our times. Since so many rich people globally depends on prices in dollars noone wants the dollar to fail, making it a monopoly without the traditional questioning of the underlying policies. The best way to protect the monopoly is through building a strong myth up around it since currencies today live and die on image rather than results. What Segarra is doing is questioning some of the foundation behind that myth. No politician or higher up would ever like to admit that many laws are bend like Beckham to convey the right message in fear of weakening the image.

      reply to this | link to this | view in chronology ]

  • icon
    Ninja (profile), 26 Sep 2014 @ 11:58am

    Now, I'm among those who are concerned about situations involving over-regulation and government interference where it's not necessary. But we should also be concerned about companies that are simply too powerful, and are able to engage in activities that abuse market power to harm the public -- and to engage regulatory capture to rubber stamp them. This episode shows how that's apparently the norm on Wall Street.

    2008. And the ongoing economic abyss we are cruising has exactly the lack of regulation or worse, lack of enforcement of such rules. How are the ISPs doing concerning the internet without being thoroughly regulated to, you know, provide a neutral, decent service? Same thing everywhere, different govt body.

    reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 26 Sep 2014 @ 12:02pm

    Peter Schiff predicted about 2008 economic fall. He predicts even more worst for US than the past one. His few alarming words & I too believe in are:-
    Heading for a massive economic problems.
    Living off charities of rest of world.
    Less export against more imports.
    O% interest rates creating massive bubble.
    Crisis looms larger than ever.
    Illusive economy with no manufacturing & $$s prniting.

    reply to this | link to this | view in chronology ]

  • This comment has been flagged by the community. Click here to show it
    identicon
    Anonymous Coward, 26 Sep 2014 @ 12:39pm

    What a surprise...
    Whats next? The jewish conspiracy is actually real?

    reply to this | link to this | view in chronology ]

    • icon
      Padpaw (profile), 26 Sep 2014 @ 1:53pm

      Re:

      How about the US government has been secretly spying on its citizens for decades.

      Oh wait that conspiracy theory turned out to be true, how silly of me.

      reply to this | link to this | view in chronology ]

  • identicon
    Baron von Robber, 26 Sep 2014 @ 12:59pm

    And some people want LESS regulation?!?

    Even not enforcing regulation that could have prevented the Great Recession, didn't.

    reply to this | link to this | view in chronology ]

    • identicon
      Anonymous Coward, 26 Sep 2014 @ 1:26pm

      Re:

      Erm... it is regulation that got us here. Just the WRONG kind of regulation.

      Did you seriously think that as your Political Hero's put in those regulations that they would not build in loopholes and attend back alley deals to protect themselves?

      Remember, every time you political critter discusses anything behind closed doors you being fooled!

      reply to this | link to this | view in chronology ]

      • identicon
        Baron von Robber, 26 Sep 2014 @ 1:52pm

        Re: Re:

        Completely wrong. If you read the article, you see that some regulators wanted to carry regulations that would have kept Goldman Sachs in check, but Fed's uppers prevented that.

        Political Hero's? You mean Eisenhower? wtf does he have to do with this?

        The purple kooaid kick in?

        reply to this | link to this | view in chronology ]

    • identicon
      yeslessregulation, 26 Sep 2014 @ 7:07pm

      Re:

      Yes, less regulation is what we need. Or did you not understand the part about 'regulatory capture'?

      reply to this | link to this | view in chronology ]

      • identicon
        Anonymous Coward, 26 Sep 2014 @ 7:30pm

        Re: Re:

        Regulatory capture in this context has little to do with the laws governing the sector and more to do with how they are enforced. The problem of bad enforcement is often a problem of the enforcement agency not enforcing the law against those they are supposed to overview. Thus the problem is often lack of enforcement of existing laws (or arbitrary enforcement or concious absurd implementations of laws).

        You can argue for less enforcement agencies, but since regulatory capture is about corruption of enforcement and often a lack of enforcing existing laws, it doesn't on its own make sense to say that less regulation will solve it. Arguably regulatory capture is solved by forcing the enforcement agency to actually use existing laws in the intended manner!

        reply to this | link to this | view in chronology ]

  • identicon
    J.R., 26 Sep 2014 @ 1:17pm

    NY Federal Reserve "regulators"

    Looks like only boot-lickers need apply...

    reply to this | link to this | view in chronology ]

  • identicon
    Aerilus, 26 Sep 2014 @ 1:19pm

    Ron Paul audit the fed just passed in the house

    reply to this | link to this | view in chronology ]

  • icon
    Padpaw (profile), 26 Sep 2014 @ 1:35pm

    lucky she is not in Australia under their new law this would be akin to revealing confidential information and get her labeled a terrorist.

    reply to this | link to this | view in chronology ]

  • icon
    That Anonymous Coward (profile), 26 Sep 2014 @ 2:31pm

    Corporations have done so much good for this country.
    Destroying communities, jobs, lives...and we let them apply those same ideals to the Government.
    How are we shocked that it is all going wrong?
    Profits are above the law.
    Profits are above our rights.

    reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 26 Sep 2014 @ 3:48pm

    Thank you for writing this article.
    I have always wondered how it is that those at the helm of banks and the financial industry have avoided negative financial or legal repercussions... (Note that I avoid using the term "leadership"). We lock up parents who make smaller mistakes for ages. These guys . . . . Apparently they make enough money that "laws don't apply" to them.

    reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 27 Sep 2014 @ 12:47am

    "Own culture"

    Does the Federal Reserve actually have its own culture? I'd imagine it's the same culture as Wall Street, given how Wall Street people move in and out of government.

    reply to this | link to this | view in chronology ]

  • icon
    GEMont (profile), 27 Sep 2014 @ 4:38pm

    What we need now is a good war to put all these irritating questions to bed.

    I wonder just how many "conspiracy theories" have to prove 100% true before We the People begin to realize there actually is a real conspiracy in effect that threatens the continued existence of the USA as a nation.

    Probably all of them will have to prove true before even half the population wakes up from the American Dream, since reality is oh so much uglier than the fantasy We the People want to be real.

    And nobody wants to even consider the notion that those in authority who We the People depend on for answers and solutions to real problems, might actually be working only for themselves and have nothing but contempt for those who are willing to "job-out" responsibility for their lives and livelihoods.

    Oh well, not to worry. The Most Transparent Administration In American History has just rolled out its newest Terrorist Menace, ISIS, so, in no time at all, we will all be back to playing the most lucrative game in town, while the crooks in office eliminate any of We the People at home, who have posed a threat to Business As Usual.

    Nothing allows the sweeping of unwanted ideas and persons under the carpet better than a good old fashioned war.

    ---

    reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 28 Sep 2014 @ 1:13am

    Is it surprising that regulaters fail to regulate, when the pool they stem from have those who follow authority blindly, ..........it will be associated in all that they do........in this case, a wealthy influential bank becomes their government surrogate mother between the times of 9 till 5.......worse, after 5.
    Some folks are told whats right, and others think for themselves whats right, .....im not saying the ideas are any better, just the method.

    blind obedience vs freedom

    reply to this | link to this | view in chronology ]

  • icon
    TKList (profile), 28 Sep 2014 @ 4:17am

    Solutions

    The collusion between the Federal Government and banks with the FED, FDIC, FHA, HUD, Freddie Mac, Fannie Mae, Community Reinvestment Act and more is what led to the financial crisis.

    When government gets in bed with big business we get: ratings agencies rubber stamping investments, regulators looking the other way, banks giving liar loans, the government bailing out banks and taxpayers paying for everything.

    This regulatory capture also increases the barriers to competition, further hurting citizens/consumers.

    Abolish the FED, FDIC, FHA, HUD, Freddie Mac and Fannie Mae. Repeal the Community Reinvestment Act.

    Abolish the Federal Reserve as we know it. Replace it with an automated system as Milton Friedman suggested until better solution is discovered

    reply to this | link to this | view in chronology ]

    • icon
      GEMont (profile), 29 Sep 2014 @ 2:03pm

      Re: Solutions

      "Abolish the FED, FDIC, FHA, HUD, Freddie Mac and Fannie Mae. Repeal the Community Reinvestment Act. Abolish the Federal Reserve as we know it. Replace it with an automated system as Milton Friedman suggested until better solution is discovered."

      Wow!!!

      Now there's a list of shit that will absolutely never happen!

      Seeing the heads of every crooked American politician, bankster and businessman adorning pikes along every Main Street in America has a far better chance of occurring.

      In fact, the first event could never happen until after the second event took place.

      ---

      reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 2 Oct 2014 @ 5:42am

    1) Banks created the FED or more accurately had the FED created by government.

    2) Every balloon cycle has enriched banks.

    3) The FED takes it's orders from the banks.

    This is why we need a audit of The Federal Reserve.

    reply to this | link to this | view in chronology ]


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