Bill Black, Carmen Segarra, and the Regulatory Failure That Is the Federal Reserve Bank of New York
Back in March 2009, Bill Black spent two hours chatting with folks at FDL about the economic accountability and the regulatory climate of the Federal Reserve.The former, said Black, is essential; the latter is abominable:
Regulators are deeply inferior within the institution. “Real men” at the Fed are economists and they do monetary policy. They dine with top bankers on fine china. They play squash on the Fed squash courts. Fed regulators have no power within the institution and the institution is inherently hostile to vigorous regulatory action against the big banks.
Aside: this isn’t some anti-capitalist, anti-Fed conspiracy nut. He’s kind of a big deal when it comes to understanding these things. From his University of Missouri-Kansas City bio:
Bill Black is an associate professor of economics and law. He was the executive director of the Institute for Fraud Prevention from 2005-2007. . . .
Professor Black was litigation director of the Federal Home Loan Bank Board, deputy director of the FSLIC, SVP and general counsel of the Federal Home Loan Bank of San Francisco, and senior deputy chief counsel, Office of Thrift Supervision. He was deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement.
In other words, Black knows his stuff when it comes to what it means to regulate financial institutions, because he was one of the folks who had to clean up after the 1980s S&L failures.
Black came to mind when I read about the civil lawsuit filed by Carmen Segarra, a senior bank examiner hired by the Federal Reserve Bank of New York in October 2011 and assigned to review the Legal and Compliance Division of Goldman Sachs. (Complaint filed with the court here.) As her review proceeded, she and her colleagues found that Goldman’s failure to follow banking regulations with regard to conflict of interest policies and procedures to warrant issuing a letter declaring these problems to be either a “Matter Requiring Immediate Attention” or “Matter Requiring Attention” (see paragraph 65). She informed her superiors of her team’s preliminary conclusions, and the superiors, according to Segarra, tried to get her to back down on her report. When she refused, they tried to get in the way of her continuing work to finalize her report (see 71ff) and shove her off to the side to issue their own conclusions more favorable to Goldman (82ff). When she pushed back, in writing, she was fired, less than a year after starting her employment at the Fed.
And now she’s filed suit.
In financial regulatory circles, an MRIA or MRA is a fairly big deal. It has to be published by the company in various disclosures and reports, and may induce potential customers to turn away from the company in question and current customers to leave. According to Segarra’s complaint (31), this is exactly what her bosses were afraid of.
Folks, that’s kind of the point. If you are using shady practices, these should be brought to the attention of the world. Either customers won’t care, or you better change those practices. It’s a feature, not a bug, in any regulatory system — unless you are a regulator at the Fed.
Which brings us back to Bill Black and his impression of regulators at the Fed. Black was speaking in general, and Segarra’s compliant and the documents that support it are a sadly wonderful case study of exactly why Black holds such a low view of Fed regulators.
Here’s the specific example that put me over the edge. Among the documents provided to Segarra and her team was a memo about how Goldman employees should handle potential conflict of interest problems. Right off the bat, I noticed that the memo describing these wonderful policies has these headers:
To: Goldman Sachs Private Banking
From: Central Conflicts
See what’s missing? An identifiable author. Memos like this should say “From: (author’s name), Central Conflicts” and not just the name of the office. Unless, of course, you’re trying to avoid a personally traceable record for purposes of accountability. Rule one in avoiding accountability: use the passive voice whenever possible, to obscure agency. Rule two: When you can’t simply use the passive voice, attribute things to an institution rather than a person.
Think I’m reading too much into a header? Take a look at the content. Under the heading “How do I launch a check?” was this:
Emails or other written communications should not be used for vetting conflicts because it is unrealistic to expect that all relevant information will be properly captured in written communications, particularly email, and they may create a misleading record of our thought processes and deliberations.
(Underlining in the original.)
Right. It’s much better to just pick up the phone or walk across the hall and verbally deliver all relevant information, because word of mouth is (a) so much more reliable and (b) a much clearer medium for creating a proper record of the corporate thought process and deliberations. Try it with the IRS some time, and see how well that works out.
This isn’t how you vet potential conflicts of interest. This is how you work to avoid accountability, and preserve the ability to deny that any conflicts of interest exist.
This suit is the harpoon in the heart of Goldman Sachs — not their corporate offices, but their chummy relationship with FRBNY. As bad as Goldman’s conflict of interest problems are (and they are legion), the conflict of interest problems at FRBNY are monumentally worse. I’m not surprised that this is how the Fed operates when it comes to regulatory matters (I noted back in 2009 how their own IG — in a very mild slap-on-the-wrist manner — demonstrated how poorly they do oversight), but I’m very surprised their regulatory problems are coming out with such a well-documented case of wrongful termination.
There’s a lot more in Segarro’s complaint that backs up this kind of nonsense, and the fact that the higher-ups at the Fed tried to soft-pedal things and then put Goldman’s interests ahead of the public is appalling. This memo on handling potential conflicts of interest alone ought to be proof that Goldman doesn’t have proper conflict of interest policies, and if Segarra waved this under her boss’ nose and he told her to ignore it, the court should not only award her damages and require that FRBNY re-employ her, but order that she should get her boss’ old job.
Oh, and one more thing.
Maybe with Janet Yellen at the helm of the entire Federal Reserve System and Elizabeth Warren in the US Senate, Teh Boyz won’t continue to be in a position to keep acting like this.
Photo by Radoslav Minchev used under Creative Commons 2.0 Generic license