Delamaide: Goldman tapes expose Fed weakness

Carmen Segarra / Nabil Rahman for ProPublica

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.

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