Delamaide: Goldman tapes expose Fed weakness
WASHINGTON — "Regulatory capture" may sound innocuous enough as a term, but when you hear it in action it can be chilling.
This is what happened last week when secretly taped sessions involving bank examiners at the New York Federal Reserve were played on NPR.
What these tapes depicted were bank regulators who were timid and equivocating,
deferential in the extreme to the bank they were supposed to keep in
line, especially after Wall Street's flagrant disregard for law and
ethics led to the financial crisis that crippled the world economy.
The
New York Fed is the lead regulator for the main Wall Street banks and
even has supervisors embedded in the offices of Goldman Sachs and
others.
What
emerges in the tapes is that the team embedded in Goldman is the very
definition of regulatory capture — when regulators become more oriented
to the institution they are supervising than to representing the public
interest.
These
sessions were taped by a member of that Fed team, Carmen Segarra, who
was fired after seven months on the job and is suing the Fed, claiming
it was her refusal to go along with this timorous form of bank
supervision that led to her dismissal.
In
one session on tape, as the examining team was discussing tactics for
probing a Goldman deal one of them characterized as "legal but shady,"
this timidity was on full display.
"I
think we don't want to discourage Goldman from disclosing these types
of things in the future," said one male participant who remained
unidentified in the transcript,"and
therefore maybe you know some comment that says don't mistake our
inquisitiveness, and our desire to understand more about the marketplace
in general, as a criticism of you as a firm necessarily. Like I don't
want to, I don't want to hit them on the bat with the head [sic], and
they say screw it, we're not gonna disclose it again, we don't need to."
There
are so many things wrong with that statement, it's hard to know where
to begin, but in general it's a far cry from the tough enforcer we hoped
we had after the clear infractions in the past.
And yet this recording was made in 2012 — after the crisis, after the Dodd-Frank financial reform, and after an internal study at the New York Fed faulted the exam process for this very lack of toughness.
It
is not that it's really a surprise because it's clear enough in the
string of recent billion-dollar settlements with no prosecutions that
Wall Street banks are still too big to fail and still consider
themselves above the law.
But to hear it loud and clear on the tapes makes it unavoidably clear why our regulatory system is not working.
Bestselling author Michael Lewis already dubbed this the
"Ray Rice video" for the financial sector. Just as the security video
of a beefy football player punching his girlfriend in the face and
knocking her out has a greater impact than the antiseptic term "domestic
violence," so, too, hearing the craven rationalizations of the Fed exam
team brings home what "regulatory capture" really is about.
As
with the Rice video, this documentary evidence also takes it out of the
realm of he said-she said, because, needless to say, the Fed has
impugned Segarra's claims, saying that she was dismissed for performance
reasons.
Her lawsuit was dismissed in the first instance by a judge, Naked Capitalism reported,
whose husband was a partner at the Davis Polk law firm representing
Goldman at the time, and who by rights should have recused herself from
the case.
Segarra
is appealing the lawsuit, but in this instance she is just that
elevator security camera recording evidence for the rest of us to
realize what is really going on.
Sen.
Elizabeth Warren, the Massachusetts Democrat who has been a scourge for
Wall Street, on Friday called for hearings on the financial regulators
based on "the disturbing issues raised by today's whistle-blower
report."
The
New York Fed's 2009 internal report, conducted by Columbia professor
David Beim, was part of the trove of documents released to the Financial
Crisis Inquiry Commission but largely unnoticed until highlighted last week by ProPublica, which worked with NPR on the Segarra report.
Beim's
report said the New York Fed's "culture is marked by insufficient
individual initiative and lacks fluid communication. There is excessive
risk-aversion."
That
was the culture at the bank after six years of being headed by Timothy
Geithner, who became President Obama's first Treasury secretary. His
attitude toward the Fed's regulatory role is probably best summed up by
his statement during his confirmation hearings that he had never been a
regulator.
The
tapes show, however, that very little progress has been made under his
successor, William Dudley, a former chief economist for Goldman Sachs.
In fact, ProPublica notes, the head of the Fed team at Goldman, Mike
Silva, had previously been Geithner's chief of staff at the Fed.
In
short, we can safely assume that the incidents taped by Segarra are not
an aberration but part of a lax regulatory culture that allowed the
financial crisis to happen and has changed very little since then.
We
can only hope that new hearings, when Congress reconvenes in November,
spurred by the disclosures in these tapes, will finally light a fire
under these regulators.
Columnist
Darrell Delamaide has reported on business and economics from New York,
Paris, Berlin and Washington for Dow Jones news service, Barron's,
Institutional Investor and Bloomberg News service, among others
SOL: Why should anyone be surprised??? Practically everyone in the FED, financial advisors to both Houses of Congress
and the President, plus the Treasury Secretaries have all come from
Goldman Sachs. It satnds to reason that they ALL belong to the same
FRATERNITY/BROTHERHOOD/ ZELITIST ORGANIZATIONS THAT ARE SWORN PROTECT
THEIR OWN.
ITS SIMPLY THE WAY IT IS TODAY!
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