Something is missing from the discussion of the secret audiotapes of the Federal Reserve Bank of New York.
By now, I’m sure we’ve all heard about the whistle-blower case brought by Carmen Segarra that was denied and will be appealed.
Same goes for the rule-skirting three-way swap between Goldman Sachs, Banco Santander, and Qatar involving bonds, shares in Santander Brasil, and a sneaky way to make it seem like Banco Santander was fulfilling capital requirements.
Virtually every article I’ve read on the situation points to the conflict of interest at the heart of the matter. I don’t see any reason to add to this aspect of the topic.
I’d much rather spend my time pointing out a critical component of the coverage from This American Life and ProPublica that is being ignored in the news and editorial articles.
The Fed, newly humbled and introspective following the Great Recession, took a critical look at itself, then completely failed to learn it’s lesson.
A Good Hard Look
Back in 2009, Federal Reserve Bank of New York President William Dudley had to answer for how the Fed failed in such a big way and how it could do better.
To do this, he brought in ex-banker and current Columbia University finance professor David Beim.
Beim was given unlimited access to information and personnel, and a team of managers was put under his command.
As he made his rounds and interviewed New York Fed employees, he started to see the real issue…
The Fed had a deeply rooted culture problem. The examiners in banks were cozying up to the people they were supposed to keep under a critical eye. Some even admitted they were reeled into “regulatory capture” within mere weeks on the job.
At the same time, the examiners were too risk-averse when it came to their jobs. They feared contradicting bosses or dissenting from the larger official stance.
Examiners were essentially rewarded for becoming rubber stamps and “yes men.”
Otherwise, they risked contradicting their own bosses, accumulating negative performance reviews, and ultimately losing their jobs.
Fed managers used consensus-based decisions and repeatedly vetted findings to water them down and eliminate unacceptable alternative views. Continuing dissent was punished.
The Fed’s culture of secrecy that had dominated the last century made it worse as well. With only press releases and the official policies and decisions visible, examiners had little to no chance of recourse or vindication.
Beim’s 27-page report concluded with recommendations for fixing the broken Fed, one of which led to the hiring — and firing — of Carmen Segarra.
Getting on the Right Path
Beim wanted the Fed to hire experts who would be unfazed by the climate of complacency and unanimity and who would speak their minds to both the banks they watched and their own bosses.
The report specifically called for Fed managers to take the lead in hiring “out-of-the-box thinkers,” even if it meant including “disruptive personalities.”
Beim saw a need for expert examiners who take contrarian stances, ask the questions examiners were afraid to ask, and shake up the deeply ingrained status quo.
Segarra was a perfect fit. She had an Ivy League education and over 13 years of experience in bank regulation compliance.
After being hired, she went straight into Goldman Sachs. A mere seven months later, she was kicked out of her job.
Shortly after, she filed her lawsuit, claiming she was retaliated against for refusing to back down from negative findings and not signing off on the New York Fed’s stance when it contradicted her own.
Coworkers found her to be too outspoken about the issues at Goldman Sachs and the Fed. With seemingly no other recourse, she started her secret recordings.
One of those recordings is from a meeting with her boss a week before she was fired. In it, the boss repeatedly tries to get her to change her conclusion regarding a missing policy to handle conflicts of interest.
She offered to review her findings, but to no avail. She was being trumped by higher-ups who would not tolerate confronting Goldman Sachs or her refusal to back down.
Business as Usual
Three years after Beim’s report, it is clear that the Fed has completely missed its chance to fix itself and protect the economy and people from a complacent and complicit internal culture.
The Fed and Segarra’s lawyer are firing salvos back and forth about the nature of her firing, but we can ignore that.
Same goes for the lack of — or lapses in — a conflict-of-interest policy, which Goldman Sachs just announced it will investigate and strengthen.
I’m very concerned about the complicity and deference to the too-big-to-fail banks, but that should certainly come as no surprise to anyone.
The Levy Economics Institute of Bard College found the total bailout of these banks added up to $29 trillion — and that is just through November 2011.
In comparison, this convoluted deal between Goldman Sachs and Banco Santander is barely a blip on the radar compared to the full scope of how the Fed has played favorites.
What disturbs me, as it should for anyone who was affected, is how the only meaningful attempt to revise business as usual at the New York Fed was undermined by higher-ups that forgot — or conveniently ignored — their role in causing the Great Recession.
That is abundantly clear in the recordings Segarra made, and it shows how the Fed failed its chance at redemption.
If just one thing comes from the secret recordings, I can only hope it’s that the Fed takes the second opportunity from the renewed scrutiny to do what it should have done years ago: clean house and fix itself.
