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October 01, 2014 at 11:43 AM
Wall Street’s reputation, and the government’s perhaps even more, have not been enhanced by the release of secretly recorded tapes that appear to portray a supine New York Fed fearful of offending Goldman Sachs.
On Friday This American Life radio program and ProPublica jointly released an investigative report on the story of former Federal Reserve Bank of New York bank examiner Carmen Segarra, who was fired after only seven months on the job, but not before secretly recording meetings including one in which her boss persistently tried to get Segarra to back down from a negative finding about Goldman.
The investigative report provocatively commences with the conclusions of a once-secret report by a Columbia University professor, David Beim, hired by the New York Fed to help it avoid a repetition of the laxity that enabled banks under its supervision to trigger the financial crisis through their excessive leverage.
Beim had faulted the Fed for a culture of consensus and “regulatory capture,” as a result of a tendency of Fed employees to seek future high-compensation employment with the very banks they currently regulate.
The finance professor recommended the Fed hire examiners who would be unafraid to speak up and ask tough questions, as a direct result of which the New York Fed in late 2011 hired Segarra, an Ivy League and Sorbonne-educated international lawyer with 13 years of compliance experience.
In that painful back-and-forth session with the head of the Fed’s Goldman Sachs team, which lasts 40 minutes out of a total 46 hours of recordings, the investigative report says:
“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.
“‘Why do you have to say there’s no policy?’ her boss said near the end of the grueling session.
“‘Professionally,’ Segarra responded, ‘I cannot agree.’
In other highlights of the recordings, Segarra’s supervisor describes one Goldman deal as “legal but shady” and calls for further investigation. But the Fed’s Goldman team backs off a provision she finds that could thwart the deal, lauds Goldman for its “thoroughness” and worries aloud that too much “inquisitiveness” might discourage the bank from making voluntary disclosures.
“To Segarra, the ‘inquisitiveness’ comment represented a fear of upsetting Goldman,” the investigative report says.
In a separate exchange with her manager, Segarra is criticized for being too “transactional” and not more “relational.”
While commended for her knowledge, her manager says her colleagues on the Goldman team think she has “sharper elbows, or you’re sort of breaking eggs.”
When Segarra asks for specifics, the recording reveals she is told:
“I would ask you to think about a little bit more, in terms of, first of all, the choice of words and not being so conclusory.”
She is further told:
