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.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:
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.
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."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.
This conversation occurred the day before the New York Fed team met with Goldman officials to learn about the inner workings of the deal.
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."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.
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?"
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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conspiracy theory becomes conspiracy fact
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.
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Re: conspiracy theory becomes conspiracy fact
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.
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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.
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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.
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Re: Re:
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.
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Re: Re: Re:
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.
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2. Crowdfund hitmen.
3. Rebuild the system without the "ultrarich" element present.
4. Profit!
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Re: Re:
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.
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No mystery as to why this is so...
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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.
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Re: Depression
--The USG destroys countries that try to do this (Iraq & Libya).
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Re: Depression
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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.
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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.
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Whats next? The jewish conspiracy is actually real?
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Oh wait that conspiracy theory turned out to be true, how silly of me.
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Even not enforcing regulation that could have prevented the Great Recession, didn't.
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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!
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Political Hero's? You mean Eisenhower? wtf does he have to do with this?
The purple kooaid kick in?
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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!
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NY Federal Reserve "regulators"
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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.
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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.
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"Own culture"
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What we need now is a good war to put all these irritating questions to bed.
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.
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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
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Solutions
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
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Re: Solutions
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.
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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.
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