A former examiner for the Federal Reserve Bank of New York has dropped a major bomb on Wall Street by releasing 46 hours of secretly recorded audio that shows how the supposed government watchdog is nothing more than a lap dog for Goldman Sachs and other financial institutions it is tasked with regulating.
The 2011-2012 recordings by Carmen Segarra — released with her consent Friday through WBEZ’s “This American Life” and investigative-journalism nonprofit ProPublica — raise serious allegations that some of Segarra’s then-supervisors regularly looked the other way regarding issues their workers raised with banking practices.
For instance, one regulator, after a meeting with Goldman honchos, is heard saying, “I don’t want to hit them on the bat with the head [sic].” In a separate meeting, Segarra is told by a supervisor that consumer laws don’t apply to their wealthiest clients.
“The Ray Rice video for the financial sector has arrived,” Michael Lewis, best-selling author of “Flash Boys: A Wall Street Revolt,” said after listening to the tapes.
Segarra, who was assigned to regulate Goldman, claims she was fired in May 2012 for not going soft on the financial giant. Now, her whistleblowing could spawn a congressional probe.
Upon learning of the tapes, Sen. Elizabeth Warren (D-Mass.), a member of the Senate Banking Committee, called for an investigation into whether the New York Fed has been too soft on the institutions it regulates.
“Congress must hold oversight hearings on the disturbing issues raised by today’s whistle-blower report when it returns in November, because it’s our job to make sure our financial regulators are doing their jobs,” Warren said.
The Segarra tapes are probably most damning for her ex boss, senior regulator Michael Silva. Silva had set up a meeting to grill Goldman about a $40 million deal it set up with Banco Santander, in which Goldman would buy some of their assets to make the Spanish bank’s capital rations look better for regulators.
In one recording, Silva boasts that he’s going to grill Goldman executives about why the banks didn’t seek his institution’s approval on a deal he called “legal, but shady.” Yet during a lengthy call with Goldman, Silva makes only a passing reference to the issue.
Segarra is heard on another tape paraphrasing comments made to her by Silva, saying, “Credibility at the Fed is about subtleties and about perceptions, as opposed to reality.” She was speaking to another company honcho, who agreed with what she said.
Segarra sued The Fed, Silva and other honchos last year, alleging she was fired after refusing to change certain Goldman findings.
Manhattan federal Judge Ronnie Abrams tossed the whistleblower suit in April, ruling Segarra failed to link her disclosures of Goldman’s alleged violations with her dismissal. Segarra is appealing.
The New York Fed has denied the allegations.
We always pretty much knew that our banking regulators were captured by the industry they regulate, and now we apparently have proof.
"The Ray Rice video for the financial sector has arrived," famous author and finance-explainer Michael Lewis declared on Friday morning. He was referring to a new report from ProPublica and This American Life about Carmen Segarra, a former New York Federal Reserve bank examiner who claims she was fired in 2012, after seven months on the job, for examining Goldman Sachs a little too aggressively.
It seems a safe bet, though, that this story won't have quite the same impact as the video of Ray Rice punching his wife unconscious in an elevator. And it may strike some as terrifically tone-deaf to compare the inner workings of banking to the horror of domestic violence. Still, Lewis's overall point holds: Here is the material proof of something we knew was happening all along.
Based on nearly 48 hours of secretly taped conversations among Fed officials and Goldman Sachs, the reports make a strong case that bank regulators are terrified of offending the banks they're regulating, exposing what Lewis calls their "breathtaking wussiness." This suggests that, despite the worst financial crisis since at least the Great Depression and financial reform that was supposed to put Wall Street on a shorter leash, regulators still bow to banks as much as they always have. That makes a future crisis seem even more likely, with banks still able to persuade regulators that they're not taking crazy risks.
The New York Fed, in a written response to ProPublica and This American Life, denied Segarra's accusations:
"The New York Fed categorically rejects the allegations being made about the integrity of its supervision of financial institutions," it wrote. It added that it would not comment further because it is still in court fighting a wrongful-termination suit by Segarra.
Goldman Sachs, in its own written response, fired a volley directly at Segarra, claiming she was mistaken about some key facts and cattily observing that she had applied for a job at Goldman three times before going to work for the New York Fed. Segarra told ProPublica she had actually applied at Goldman four times, but that she had also applied for jobs at a lot of other banks. Goldman Sachs spokesman David Wells did not immediately respond to a request for further comment.
The Huffington Post is still listening to the recordings and will update this story with more juicy details as we find them.
Still it's doubtful that the Segarra tapes will have anything near the impact of the Rice footage. The Rice video was not only far more visceral and easier to understand, but it touched a still-raw nerve in our national consciousness. Our feelings about Wall Street are a little cooler, the public image of banks has mostly been rehabilitated, and our concerns about bank regulation are minimal.
See you at the next crisis.
Update: Having listened to the recordings, or at least the ones curated by ProPublica and This American Life, we can confirm that they do indeed show New York Fed bank examiners being feckless and mush-mouthed and afraid when dealing with Goldman Sachs, at the very least.
There is no clear bombshell here -- just further evidence that not enough has changed in the cozy relationship between banks and regulators, and that the Fed should be far more transparent about that relationship.
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