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Saturday, October 22, 2016

Sept. 26 (Bloomberg View) — Probably most people would agree that the people paid by the U.S. government to regulate Wall Street have had their difficulties. Most people would probably also agree on two reasons those difficulties seem only to be growing: an ever-more complex financial system that regulators must have explained to them by the financiers who create it, and the ever-more-common practice among regulators of leaving their government jobs for much higher paying jobs at the very banks they were once meant to regulate. Wall Street’s regulators are people who are paid by Wall Street to accept Wall Street’s explanations of itself, and who have little ability to defend themselves from those explanations.

Our financial regulatory system is obviously dysfunctional. But because the subject is so tedious, and the details so complicated, the public doesn’t pay it much attention.

That may very well change today, for today — Friday, Sept. 26 — the radio program “This American Life” airs a jaw-dropping story about Wall Street regulation, and the public will have no trouble at all understanding it.

The reporter, Jake Bernstein, has obtained 46 hours of tape recordings, made secretly by a Federal Reserve employee, of conversations within the Fed, and between the Fed and Goldman Sachs. The Ray Rice video for the financial sector has arrived.

First, a bit of background — which you might get equally well from today’s broadcast as well as from this article by Pro Publica. After the 2008 financial crisis, the New York Fed, now the chief U.S. bank regulator, commissioned a study of itself. This study, which the Fed also intended to keep to itself, set out to understand why the Fed hadn’t spotted the insane and destructive behavior inside the big banks, and stopped it before it got out of control. The “discussion draft” of the Fed’s internal study, led by a Columbia Business School professor and former banker named David Beim, was sent to the Fed on Aug. 18, 2009.

It’s an extraordinary document. There is not space here to do it justice, but the gist is this: The Fed failed to regulate the banks because it did not encourage its employees to ask questions, to speak their minds or to point out problems.

Just the opposite: The Fed encourages its employees to keep their heads down, to obey their managers and to appease the banks. That is, bank regulators failed to do their jobs properly not because they lacked the tools but because they were discouraged from using them.

The report quotes Fed employees saying things like, “until I know what my boss thinks I don’t want to tell you,” and “no one feels individually accountable for financial crisis mistakes because management is through consensus.” Beim was himself surprised that what he thought was going to be an investigation of financial failure was actually a story of cultural failure.

Any Fed manager who read the Beim report, and who wanted to fix his institution, or merely cover his ass, would instantly have set out to hire strong-willed, independent-minded people who were willing to speak their minds, and set them loose on our financial sector. The Fed does not appear to have done this, at least not intentionally. But in late 2011, as those managers staffed up to take on the greater bank regulatory role given to them by the Dodd-Frank legislation, they hired a bunch of new people and one of them was a strong-willed, independent-minded woman named Carmen Segarra.

I’ve never met Segarra, but she comes across on the broadcast as a likable combination of good-humored and principled. “This American Life” also interviewed people who had worked with her, before she arrived at the Fed, who describe her as smart and occasionally blunt, but never unprofessional. She is obviously bright and inquisitive: speaks four languages, holds degrees from Harvard, Cornell and Columbia. She is also obviously knowledgeable: Before going to work at the Fed, she worked directly, and successfully, for the legal and compliance departments of big banks. She went to work for the Fed after the financial crisis, she says, only because she thought she had the ability to help the Fed to fix the system.

In early 2012, Segarra was assigned to regulate Goldman Sachs, and so was installed inside Goldman. (The people who regulate banks for the Fed are physically stationed inside the banks.)

The job right from the start seems to have been different from what she had imagined: 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.”

This sort of thing occurred often enough — Fed regulators denying what had been said in meetings, Fed managers asking her to alter minutes of meetings after the fact — that Segarra decided she needed to record what actually had been said. So she went to the Spy Store and bought a tiny tape recorder, then began to record her meetings at Goldman Sachs, until she was fired.

(How Segarra got herself fired by the Fed is interesting. In 2012, Goldman was rebuked by a Delaware judge for its behavior during a corporate acquisition. Goldman had advised one energy company, El Paso Corp., as it sold itself to another energy company, Kinder Morgan, in which Goldman actually owned a $4 billion stake, and a Goldman banker had a big personal investment. The incident forced the Fed to ask Goldman to see its conflict of interest policy. It turned out that Goldman had no conflict of interest policy — but when Segarra insisted on saying as much in her report, her bosses tried to get her to change her report. Under pressure, she finally agreed to change the language in her report, but she couldn’t resist telling her boss that she wouldn’t be changing her mind. Shortly after that encounter, she was fired.)

I don’t want to spoil the revelations of “This American Life”: It’s far better to hear the actual sounds on the radio, as so much of the meaning of the piece is in the tones of the voices — and, especially, in the breathtaking wussiness of the people at the Fed charged with regulating Goldman Sachs. But once you have listened to it — as when you were faced with the newly unignorable truth of what actually happened to that NFL running back’s fiancée in that elevator — consider the following:

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.

Photo: SEIU via Flickr

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Copyright 2014 The National Memo
  • Dominick Vila

    The sad truth is that when it comes to banks, U.S. regulations are so lax, or favorable to Wall Street, that for all intents and purposes they are non-existent. The reason has nothing to do with the Federal government not knowing what needs to be done, or government officials being overloaded with work, the real reason is that the top 1% of our society owns our government, our political processes, and anything dealing with the promotion of business and the accumulation of capital by the privileged elite.

    • highpckts

      Yep! We have been bought and paid for!!

    • elw

      Yes just another form of owners and slaves.

  • Eleanore Whitaker

    Whenever I’ve heard the flimsy excused coming from the mouths of the SEC and other government honchos regarding why Big Bank CEOs can’t be jailed, it is a testament to their refined art in duplicity. According to everyone of these so-called financial watchdogs, the CEOs may not have “known” what the various branches were doing. Want to see the duplicity in that? They accepted that only Madoff was guilty of wrongdoing. Only Madoff went to prison. Next excuse?

    • … & yet we keep forgetting – this isn’t about the SEC, the big banks, the Attorney General, the President or Congress – this is about US & our RESPONSIBILITY to handle OUR business as DIRECTED by the Constitution! Or have we (some of us anyway) really forgotten who owns this & whose fight make sure laws are enforced the way they should be? That would be you & I & every other citizen nationally…

      • Eleanore Whitaker

        Normally, I would agree with your opinion. Unfortunately, I worked for 2 Fortune 50 companies back in the day. Most Americans will NEVER be privy to the “deals” that go on in the corporation headquarter meetings.

        We have forgotten nothing. All it takes to misdirect the wishes of the American public is a handful of NeoCon Robber Barons, Titans of Industries our tax dollars pay to keep in existence and nothing any American without second sight or ESP can do will alter how their money affects who and what the government becomes.

        All you need for proof is to look at how much of our US government is now privatized. Is that a coincidence? Who made those decisions? Was this a public referendum on a public ballot? You bet not. It’s the schmoozy schmoozy game played between Big Business and politicians who have lost their ability to govern as their electorate wishes.

        When you have politicians who only care is for their campaign donors, that leaves NO room for majority rule, does it?

  • mah101

    And what will come of this? Nothing. Why? Because Elizabeth Warren = 1, big bank supporters = 99.

    We have no power. Nobody in our government seems to give a damn about the American public if their needs conflict with those of big corporations and financial institutions.

    • … but only if U possess the lack of courage to ‘do nothing’…

  • elw

    I really hope that the tapes make the impact the author hopes for. I have my doubts, and I believe that the only way anything will change is when the 99% start banging on the doors of the banks and pressuring their elected representative to the breaking point. in-spite of that I will keep my fingers crossed that I am wrong.

    • And yet, by putting hope to action, we take charge of a Democracy that has been all but abandoned by it’s citizens. We continually use corporate media as the demarcation line as to whether or not we (as Liberal/Independent voters) will get & stay active during & between election cycles. Knowing full well that ‘corporate’ is just a catch-phrase for ‘conservative’ & their (conservatives) goal is to insure as many Liberal/Independent voters are equally dejected & ‘hopeless’ & see no point in the futile exercise of voting. This is what conservatives want. We know this. But what does the nation need? I’m reading a fantastic, excellent book, ‘Herakles Gone Mad’ (by Robert Meagher) & a passage (in the chapter ‘The World Of Herakles) reminds me of just this subject, on how, inwardly, corruption & outwardly, the excesses of foolish, mindless war, eventually destroyed Athens. Even while theirs too was a Democracy, its citizens, like US, stood mute, while the interests of the wealthy, influential elites abused & manipulated the ‘system’ to their utmost pleasures, resulting in national, complete destruction. They were forerunners. We have history to guide us. Are we wise enough – COLLECTIVELY – to appreciate the distinction?

      • elw

        There are so many ways to protests. For example stop buying the corporations products. Something as simple as buying second hand will make a difference. Even better is not buying for the sake of buying, but because you actually need it. Grow your own vegetable, it fun and healthier than eating food grown by factory farmers. No one has to do it all, there are enough of us to make a difference if each and everyone of us do just a little. You have to remember they only remain rich and powerful if we buy their products.

      • Dominick Vila

        I doubt it, and it may not be long before our global hegemony depends strictly on the effectiveness of our “legions”, rather than the strength of our values and freedoms.

  • BasicFunguist

    Just four comments. How sad when Ms. Sagarra’s story strikes at the heart of the problem that brought about the near collapse of our economy in ’08.

    I applaud her courage and thank her for what she is doing for the people of this country.

    One question to Mr. Bernstein. Did I miss his attribution regarding the quote describing Goldman-Sachs as a multi-tentacled vampire squid sucking out money? If so, this should be attributed to Matt Taibbi’s most excellent wordcraft in his “Rolling Stone” article on the financial collapse.

  • ExRadioGuy15

    The revelations made in this article are not at all surprising to me and shouldn’t be to anyone else who possesses intelligence and sanity. I’m pretty sure most reasonable people KNEW that there was financial “f*ckery” going on; it’s nice to have confirmation of it.

  • As only 1 of the multitude of horror stories from the event that should be rightly considered the 2nd Great Depression of the last 100 years, we only need look at how Bernie Madhoff was able to bully & intimidate investigators/regulators who, in the course of doing their job, were effectively stone-walled & told to go to hell w/all that ‘oversight crap’. This is plain, simple accounting in other words. If it’s too complicated to be explained in lay terms, it should be illegal – PERIOD!!! To date, the banks & investment interests have still, a very hard time explaining the inner-workings of their operations. What this means is that it can happen AGAIN – any day now & there’s not a DAMN THING WE CAN DO ABOUT IT! Oh yeah?! As there are more Liberal & Independent voters in this nation, than there are conservative voters, we already KNOW what to do about it! Conversely, this makes it all the more indefensible, the reasoning for being a conservative of ANY stripe, as this was still further proof of intentional corruption, theft & illegal refusal by the Bush administration, to enforce the law in every case. The result? A sabotaged & destroyed national & further, international economy, as Europe was hit by this outrageous criminal undertaking as well – w/no one YET held accountable!!!

  • Whatmeworry

    anyone who believes that the federal govt can attract anyone who even understands the financial system is a loon. the system is complex and hiring those who no other business wants isn’t a formula for success

  • Keith

    We should have nationalized the banks that couldn’t survive the collapse and sent the decision makers to prison.