Marjory Collins Traffic jam on road from the Bethlehem Fairfield shipyard to Baltimore April 1943
It is, let’s say, exceedingly peculiar to begin with that a government – in this case the American one, but that’s just one example -, in name of its people tasks a private institution with regulating not just any sector of its economy, but the richest and most politically powerful sector in the nation. Which also happens to be at least one of the major forces behind its latest, and ongoing, economical crisis.
That there is a very transparent, plain for everyone to see, over-sized revolving door between the regulator and the corporations in the sector only makes the government’s choice for the Fed as regulator even more peculiar. Or, as it turns out, more logical. But it is still preposterous: regulating the financial sector is a mere illusion kept alive through lip service. Put differently: the American government doesn’t regulate the banks. They effectively regulate themselves. Which inevitably means there is no regulation.
The newly found attention for ProPublica writer Jake Bernstein’s series of articles, which date back almost one whole year, about the experiences of former Fed regulator Carmen Segarra, and the audio files she collected while trying to do her job, leaves no question about this.
What’s going on is abundantly clear, because it is so simple. The intention of the New York Fed as an organization is not to properly regulate, but only to generate an appearance – or illusion – of proper regulation. That is to say, Goldman will accept regulation only up to the point where it would cut into either the company’s profits or its political wherewithal.
What the ‘Segarra Files’ point out is that the New York Fed plays the game exactly the way Goldman wants it played. Ergo: there is no actual regulation taking place, and Goldman will comply only with those requests from the New York Fed that it feels like complying with.
In the articles, the term ‘regulatory capture’ pops up, which means – individual – regulators are ‘co-opted’ by the banks they – are supposed to – regulate. But the capture runs much larger and wider. It’s not about individuals, it’s a watertight and foolproof system wide capture.
The government picks a – private – regulator which has close ties to the banks. The government knows this. It also knows this means that its chosen regulator will always defer to the banks. And when individual regulators refuse to comply with the system, they are thrown out.
In one of the cases Segarra was involved in during her stint at the Fed, the Kinder Morgan-El Paso takeover deal, Goldman advises one party, has substantial stock holdings in the other, and appoints a lead counsel who personally has $340,000 in stock involved. Conflict of interest? Goldman says no, and the Fed complies (defers).
The lawsuit Segarra filed against the NY Fed and three of its executives was thrown out on technicalities by a judge whose husband was legal counsel for Goldman in the exact same case. No conflict of interest, the judge herself decides.
This is not regulation, it’s a sick and perverted joke played on the American people, which it has been paying for it through the nose for years, and will for many years to come. Sure, Elizabeth Warren picks it up now and wants hearings on the topic in Congress, but she’s a year late (it’s been known since at least December 2013 that Segarra has audio recordings) and moreover, it was Congress itself that made the NY Fed the regulator of Wall Street. Warren has as much chance of getting anywhere as Segarra did (or does, she’s appealing the case).
The story: In October 2011, Carmen Segarra was hired by New York Fed to be embedded at Goldman as a risk specialist, and in particular to investigate to what degree the company complied with a 2008 Fed Supervision and Regulation Letter, known as SR 08-08, which focuses on the requirement for firms like Goldman, engaged in many different activities, to have company-wide programs to manage business risks, in particular conflict-of-interest. Some people at Goldman admitted it did not have such a company-wide policy as of November 2011. Others, though, said it did.
Let’s take it from there with quotes from the 5 articles Bernstein wrote on the topic over the past year. To listen to the Segarra files, please go to The Secret Recordings of Carmen Segarra at This American Life.
One last thing: Jake Bernstein’s work is of high quality, but I can’t really figure why he syas things such as teh audio files show: “a New York Fed that is at times reluctant to push hard against Goldman and struggling to define its authority”. Through his work, and the files, it should be clear that just ain’t so. Both the Fed’s policy and authority are crystal clear and ironclad.
October 10 2013:
In the spring of 2012, a senior examiner with the Federal Reserve Bank of New York determined that Goldman Sachs had a problem. Under a Fed mandate, the investment banking behemoth was expected to have a company-wide policy to address conflicts of interest in how its phalanxes of dealmakers handled clients. Although Goldman had a patchwork of policies, the examiner concluded that they fell short of the Fed’s requirements. That finding by the examiner, Carmen Segarra, potentially had serious implications for Goldman, which was already under fire for advising clients on both sides of several multibillion-dollar deals and allegedly putting the bank’s own interests above those of its customers. It could have led to closer scrutiny of Goldman by regulators or changes to its business practices.
Before she could formalize her findings, Segarra said, the senior New York Fed official who oversees Goldman pressured her to change them. When she refused, Segarra said she was called to a meeting where her bosses told her they no longer trusted her judgment. Her phone was confiscated, and security officers marched her out of the Fed’s fortress-like building in lower Manhattan, just 7 months after being hired. “They wanted me to falsify my findings,” Segarra said in a recent interview, “and when I wouldn’t, they fired me.” Today, Segarra filed a wrongful termination lawsuit against the New York Fed in federal court in Manhattan seeking reinstatement and damages.
[..] Goldman is known for having close ties with the New York Fed, its primary regulator. The current president of the New York Fed, William Dudley, is a former Goldman partner. One of his New York Fed predecessors, E. Gerald Corrigan, is currently a top executive at Goldman. At the time of Segarra’s firing, Stephen Friedman, a former chairman of the New York Fed, was head of the risk committee for Goldman’s board of directors.
[..] Segarra’s termination has not been made public before now. She was specifically assigned to assess Goldman’s conflict-of-interest policies and took a close look at several deals, including a 2012 merger between two energy companies: El Paso Corp. and Kinder Morgan. Goldman had a $4 billion stake in Kinder Morgan while also advising El Paso on the $23 billion deal. Segarra said she discovered previously unreported deficiencies in Goldman’s efforts to deal with its conflicts, which were also criticized by the judge presiding over a shareholder lawsuit concerning the merger. Her lawsuit also alleges that she uncovered evidence that Goldman falsely claimed that the New York Fed had signed off on a transaction with Santander, the Spanish bank, when it had not. A supervisor ordered her not to discuss the Santander matter, the lawsuit says, allegedly telling Segarra it was “for your protection.”
[..] As part of her examination, Segarra began making document requests. The goal was to determine what policies Goldman had in place and to see how they functioned in Kinder Morgan’s acquisition of El Paso. The merger was in the news after some El Paso shareholders filed a lawsuit claiming they weren’t getting a fair deal.
[..] By mid-March 2012, Goldman had given Segarra and a fellow examiner from the New York State Banking Department documents and written answers to their detailed questions. Some of the material concerned the El Paso-Kinder Morgan deal. Segarra and other examiners had been pressing Goldman for details about the merger for months. But it was from news reports about the shareholder lawsuit that they learned the lead Goldman banker representing El Paso, Steve Daniel, also had a $340,000 personal investment in Kinder Morgan, Segarra said.
[..] At the New York Fed, Goldman told the regulators that its conflict-of-interest procedures had worked well on the deal. Executives said they had “exhaustively” briefed the El Paso board of directors about Goldman’s conflicts, according to Segarra’s meeting minutes. Yet when Segarra asked to see all board presentations involving conflicts of interest and the merger, Goldman responded that its Business Selection and Conflict Resolution Group “as a general matter” did not confer with Goldman’s board. The bank’s responses to her document requests offered no information from presentations to the El Paso board discussing conflicts, even though lawsuit filings indicate such discussions occurred.
Goldman did provide documents detailing how it had divided its El Paso and Kinder Morgan bankers into “red and blue teams.” These teams were told they could not communicate with each other — what the industry calls a “Chinese Wall” — to prevent sharing information that could unduly benefit one party. Segarra said Goldman seating charts showed that that in one case, opposing team members had adjacent offices. She also determined that three of the El Paso team members had previously worked for Kinder Morgan in key areas. “They would have needed a Chinese Wall in their head,” Segarra said.
[..] In April, Goldman assembled some of its senior executives for a meeting with regulators to discuss issues raised by documents it had provided. Segarra said she asked [Michael] Silva [senior supervising officer for the Fed at Goldman] to invite officials from the SEC, because of what she had learned about the El Paso-Kinder Morgan merger, which was awaiting approval by other government agencies. Segarra said she and a fellow examiner from New York state’s banking department had prepared 65 questions. But before the meeting, Silva told her she could only ask questions that did not concern the El Paso-Kinder Morgan merger, she said.
[..] As the Goldman examination moved up the Fed’s supervisory chain, Segarra said she began to get pushback. According to her lawsuit, a colleague told Segarra in May that Silva was considering taking the position that Goldman had an acceptable firm-wide conflict-of-interest policy. Segarra quickly sent an email to her bosses reminding them that wasn’t the case and that her team of risk specialists was preparing enforcement recommendations. In response, Kim [her supervisor] sent an email saying Segarra was trying to “front-run the supervisory process.”
October 28 2013:
After getting a master’s degree in French cultural studies at Columbia’s campus in Paris, she went on to law school at Cornell. She then spent 13 years working at different financial firms, including Citigroup and Société Générale. Outside of the office, she held leadership positions in the Hispanic National Bar Association. Hired by the Fed as a legal and compliance specialist, she was told to pay particular attention to how Goldman was complying with the Fed’s requirements on conflicts of interest. Segarra says she was fired after she found that Goldman lacked an adequate company-wide policy to manage conflicts of interest — and after her superiors urged her to change this finding and she refused.
Dec 6 2013:
Segarra claims she was terminated for refusing to change her finding that Goldman Sachs did not have appropriate policies for handling conflicts of interest in its business dealings. Her complaint alleges that the senior supervising officer for the Fed at Goldman, Michael Silva, and his deputy, Michael Koh, obstructed her examination of Goldman on several occasions. Silva, who had worked at the New York Fed since 1992, left last month to take a job as the chief regulatory officer and compliance leader of GE Capital. That firm is one of the Too-Big-to-Fail financial institutions regulated by the New York Fed.
[..]While at the New York Fed, Segarra had a direct supervisor, Jonathon Kim, who oversaw legal and compliance specialist examiners stationed at several banks. According to the amended complaint, Kim, also a defendant, told Segarra that the Fed “had failed to clearly articulate the different roles of [the relationship managers] and bank examiners.” When Segarra complained about the obstruction, the complaint says, Kim told her she needed to learn “the critical skills of ‘absorbing and diffusing.’” “They allowed this lack of clarity to interfere with Carmen’s bank examining activity,” said Segarra’s attorney, Linda Steagle. “In fact we are saying that this amorphous structure exists, in large part, so they can do exactly that.”
[..] In an addition to the amended complaint, the parties this week filed a joint letter detailing a trial schedule that is expected to stretch into next year. The letter discloses that Segarra possesses “audio recordings of several meeting with defendants” and suggests that they might assist the Court if there are disputes over facts in the case. The New York Fed is one of 12 regional reserve banks that form the Federal Reserve System. It is the largest such bank in terms of assets and volume of activity, according to its website. While the New York Fed is a private bank, the Federal Reserve’s Board of Governors in Washington, DC, delegates a public regulatory function to it.
April 24 2014:
U.S. District Judge Ronnie Abrams in New York ruled late Wednesday that the assertion by Carmen Segarra that supervisors retaliated against her failed to fall within the whistleblower statute under which she filed her case. The law, enacted in 1989 after the savings and loan crisis to protect bank examiners from outside interference, covers an individual who “discloses protected information to a third party, not when she is asked to alter that information,” the judge ruled. In October, [Segarra] filed a wrongful termination complaint naming the New York Fed and three of its officials.
The judge dismissed the claims against the three officials, saying the law could only be used to file lawsuits against institutions and not individuals. Known as the “depository institution employee protection remedy,” it safeguards examiners who “provide information” about “any possible violation of any law or regulation.” In her ruling, Abrams also concluded that the Fed guidance Segarra cited — that Goldman Sachs have a firm-wide conflicts-of-interest policy — was only advisory and not a law or regulation. As such, it was not covered under the statute, the judge decided.
[..] Abrams’ ruling also recounts how, earlier this month, the judge disclosed to the parties in the case that her husband, Greg Andres, a partner at the law firm Davis Polk & Wardwell in New York, was representing Goldman Sachs in an advisory capacity. During a telephone conference, Abrams asked lawyers for the Fed and Segarra if they wanted to her to recuse herself or consult with their clients. The revelation came the day before oral arguments on a motion by the New York Fed to dismiss the case. During the call, both sides declined to request a recusal.
After the arguments, however, Segarra’s lawyer sent out a list of questions asking about the relationship of Andres with Goldman Sachs. In her ruling, Abrams said the questions came too late and gave the appearance that Segarra was shopping for another judge. “Such an attempt to engage in judicial game-playing strikes at the core of our legal system,” the judge wrote. Abrams had also previously worked at a law firm with the Fed’s lead counsel in the case, but the judge said that the two “didn’t work together closely.”
September 26 2014:
Barely a year removed from the devastation of the 2008 financial crisis, the president of the Federal Reserve Bank of New York faced a crossroads. Congress had set its sights on reform. The biggest banks in the nation had shown that their failure could threaten the entire financial system. Lawmakers wanted new safeguards. The Federal Reserve, and, by dint of its location off Wall Street, the New York Fed, was the logical choice to head the effort. Except it had failed miserably in catching the meltdown. New York Fed President William Dudley had to answer two questions quickly: Why had his institution blown it, and how could it do better?
So he called in an outsider, a Columbia University finance professor named David Beim, and granted him unlimited access to investigate. In exchange, the results would remain secret. After interviews with dozens of New York Fed employees, Beim learned something that surprised even him. 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.
Beim provided a path forward. He urged the New York Fed to hire expert examiners who were unafraid to speak up and then encourage them to do so. It was essential, he said, to preventing the next crisis. A year later, Congress gave the Federal Reserve even more oversight authority. And the New York Fed started hiring specialized examiners to station inside the too-big-to fail institutions, those that posed the most risk to the financial system. One of the expert examiners it chose was Carmen Segarra. Segarra appeared to be exactly what Beim ordered.
Passionate and direct, schooled in the Ivy League and at the Sorbonne, she was a lawyer with more than 13 years of experience in compliance – the specialty of helping banks satisfy rules and regulations. The New York Fed placed her inside one of the biggest and, at the time, most controversial banks in the country, Goldman Sachs. It did not go well. She was fired after only seven months. Segarra sued the New York Fed and her bosses, claiming she was retaliated against for refusing to back down from a negative finding about Goldman Sachs. A judge threw out the case this year without ruling on the merits, saying the facts didn’t fit the statute under which she sued.
At the bottom of a document filed in the case, however, her lawyer disclosed a stunning fact: Segarra had made a series of audio recordings while at the New York Fed. Worried about what she was witnessing, Segarra wanted a record in case events were disputed. So she had purchased a tiny recorder at the Spy Store and began capturing what took place at Goldman and with her bosses. Segarra ultimately recorded about 46 hours of meetings and conversations with her colleagues. Many of these events document key moments leading to her firing. But against the backdrop of the Beim report, they also offer an intimate study of the New York Fed’s culture at a pivotal moment in its effort to become a more forceful financial supervisor.
The recordings make clear that some of the cultural obstacles Beim outlined in his report persisted almost three years after he handed his report to Dudley. They portray a New York Fed that is at times reluctant to push hard against Goldman and struggling to define its authority while integrating Segarra and a new corps of expert examiners into a reorganized supervisory scheme.
Segarra became a polarizing personality inside the New York Fed — and a problem for her bosses — in part because she was too outspoken and direct about the issues she saw at both Goldman and the Fed. Some colleagues found her abrasive and complained. Her unwillingness to conform set her on a collision course with higher-ups at the New York Fed and, ultimately, led to her undoing.
In a tense, 40-minute meeting recorded the week before she was fired, Segarra’s boss repeatedly tries to persuade her to change her conclusion that Goldman was missing a policy to handle conflicts of interest. Segarra offered to review her evidence with higher-ups and told her boss she would accept being overruled once her findings were submitted. It wasn’t enough.