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After Corruption Scandal Federal Reserve Says It May Start Enforcing Law

William C. Dudley.jpg

NY Fed President and Fmr. Chief Economist at Goldman Sachs William Dudley

In the aftermath of the exposure of the Federal Reserve collaborating with Goldman Sachs to prevent the bank from being accountable for breaking the law, Fed officials warned Wall Street that if banks did not cut back on reckless and criminal behavior they might finally face penalties including being broken up. The warnings were issued by Federal Reserve Governor Daniel Tarullo and Federal Reserve Bank of New York President William Dudley in speeches behind closed doors. The prepared remarks were published and appear to indicate an attempt to change the corrupt culture at the Federal Reserve.

According to the Wall Street Journal roughly 90 people representing all the major Too Big To Fail banks attended the meeting and were told the Federal Reserve would not only stop looking the other way on financial crimes but would consider any bank that did not shape up to be a systemic risk. Categorizing a bank as a systemic risk is the nuclear option for the Fed because under the new financial services laws – known as Dodd-Frank – a bank that is classified as a systemic risk can be broken up into smaller pieces.

But if one was to infer things from the tone of the meeting the statements seem less like a threat and more like a gentle reminder.

One attendee characterized the tone of the day as “collegial, probably a little too collegial,” in that the panelists and those in the audience appeared to pull punches and avoid harsh criticism. “This was an establishment crowd,” the person said, noting the cadre of senior bank executives, regulators, and academics there. “There was not a lot of heated controversy.”

Wall Street executives have been unsure of the Fed’s intentions regarding ethical issues, and have been working on how to respond and head off new regulations. The Clearing House Association, a trade group, circulated “messaging themes” among executives at its member banks, according to people familiar with the document. The memo suggested executives should emphasize that they view a strong internal culture as essential to banks’ success, and that the industry has been focused on the topic since the financial crisis. The talking points also said banks themselves should take the lead in initiating changes rather than having them come from the outside. Privately, bank executives have discussed an industry-led body that would set ethical standards, according to a person familiar with the discussions.

Self-regulation – what could go wrong? Then again, we’re all friends here right guys? Collegiality is really collusion when it comes to Wall Street regulators and Wall Street banks as has been repeatedly demonstrated. Of course, what do you expect when the president of the New York Fed used to be the Chief Economist at Goldman Sachs?

Though it is obvious that Wall Street regulators are doing everything possible not to regulate Wall Street it is becoming more difficult to play dumb. The corruption scandal involving taped evidence of Federal Reserve misconduct makes it hard to deny something everyone already knew – the Federal Reserve really views Wall Street as its customers not those it is supposed to supervise. And that view and surrounding culture is completely incompatible with the law as written.

So while the tone may have been collegial, the warning the Fed gave Wall Street is indicative of the increasing pressure the Federal Reserve is under to actually start enforcing the law. How much longer can the Fed resist doing its duty?

CommunityThe Bullpen

After Corruption Scandal Federal Reserve Says It May Start Enforcing Law

William C. Dudley.jpg

NY Fed President and Fmr. Chief Economist at Goldman Sachs William Dudley

In the aftermath of the exposure of the Federal Reserve collaborating with Goldman Sachs to prevent the bank from being accountable for breaking the law, Fed officials warned Wall Street that if banks did not cut back on reckless and criminal behavior they might finally face penalties including being broken up. The warnings were issued by Federal Reserve Governor Daniel Tarullo and Federal Reserve Bank of New York President William Dudley in speeches behind closed doors. The prepared remarks were published and appear to indicate an attempt to change the corrupt culture at the Federal Reserve.

According to the Wall Street Journal roughly 90 people representing all the major Too Big To Fail banks attended the meeting and were told the Federal Reserve would not only stop looking the other way on financial crimes but would consider any bank that did not shape up to be a systemic risk. Categorizing a bank as a systemic risk is the nuclear option for the Fed because under the new financial services laws – known as Dodd-Frank – a bank that is classified as a systemic risk can be broken up into smaller pieces.

But if one was to infer things from the tone of the meeting the statements seem less like a threat and more like a gentle reminder.

One attendee characterized the tone of the day as “collegial, probably a little too collegial,” in that the panelists and those in the audience appeared to pull punches and avoid harsh criticism. “This was an establishment crowd,” the person said, noting the cadre of senior bank executives, regulators, and academics there. “There was not a lot of heated controversy.”

Wall Street executives have been unsure of the Fed’s intentions regarding ethical issues, and have been working on how to respond and head off new regulations. The Clearing House Association, a trade group, circulated “messaging themes” among executives at its member banks, according to people familiar with the document. The memo suggested executives should emphasize that they view a strong internal culture as essential to banks’ success, and that the industry has been focused on the topic since the financial crisis. The talking points also said banks themselves should take the lead in initiating changes rather than having them come from the outside. Privately, bank executives have discussed an industry-led body that would set ethical standards, according to a person familiar with the discussions.

Self-regulation – what could go wrong? Then again, we’re all friends here right guys? Collegiality is really collusion when it comes to Wall Street regulators and Wall Street banks as has been repeatedly demonstrated. Of course, what do you expect when the president of the New York Fed used to be the Chief Economist at Goldman Sachs?

Though it is obvious that Wall Street regulators are doing everything possible not to regulate Wall Street it is becoming more difficult to play dumb. The corruption scandal involving taped evidence of Federal Reserve misconduct makes it hard to deny something everyone already knew – the Federal Reserve really views Wall Street as its customers not those it is supposed to supervise. And that view and surrounding culture is completely incompatible with the law as written.

So while the tone may have been collegial, the warning the Fed gave Wall Street is indicative of the increasing pressure the Federal Reserve is under to actually start enforcing the law. How much longer can the Fed resist doing its duty?

Photo from the Federal Reserve Bank of New York under public domain.

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Dan Wright

Dan Wright

Daniel Wright is a longtime blogger and currently writes for Shadowproof. He lives in New Jersey, by choice.