Tapes Reveal Wall Street’s Regulatory Capture of the Fed

ProPublica, which may be the single best journalistic enterprise in the country at this point, has a report on secret audio recordings made by a Federal Reserve Board examiner of conversations with her superiors as they continually sought to water down and cover up what was going on at Goldman Sachs. The examiner’s name is Carmen Segarra and the recordings she made reveal a great deal.

Segarra ultimately recorded about 46 hours of meetings and conversations with her colleagues. Many of these events document key moments leading to her firing. But against the backdrop of the Beim report, they also offer an intimate study of the New York Fed’s culture at a pivotal moment in its effort to become a more forceful financial supervisor. Fed deliberations, confidential by regulation, rarely become public.

The recordings make clear that some of the cultural obstacles Beim outlined in his report persisted almost three years after he handed his report to Dudley. They portray a New York Fed that is at times reluctant to push hard against Goldman and struggling to define its authority while integrating Segarra and a new corps of expert examiners into a reorganized supervisory scheme.

Segarra became a polarizing personality inside the New York Fed — and a problem for her bosses — in part because she was too outspoken and direct about the issues she saw at both Goldman and the Fed. Some colleagues found her abrasive and complained. Her unwillingness to conform set her on a collision course with higher-ups at the New York Fed and, ultimately, led to her undoing.

In a tense, 40-minute meeting recorded the week before she was fired, 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.”

It’s a very long article but very much worth reading. Though we should not need yet another demonstration of the concept of regulatory capture, it provides one in stark detail. Those in charge of enforcing regulations and providing oversight almost invariably come from the very industries they are supposed to be overseeing and the results are often disastrous.

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What Are Your Thoughts?leave a comment
  • kantalope

    It seems another agency besides Goldman lacks a way of dealing with conflicts of interest.

  • Alverant

    Do you think the libertarians and conservatives are going to have a problem with this?

  • Akira MacKenzie

    This is surprising? Barry marched into the White House promising Hope, Change, and to bring down the Banksters, then does…fucking nothing because they were afraid the economy would get worse. The paranoid in me likes to think Wall Street read Barry the riot act as he came into power: touch us and we’ll “Go Galt” and scuttle the economy. The realist says that Barry knows who fills his campaign coffers and that tossing corporate raiders into jail will hurt his future job prospects.

    America’s business is business.

  • parasiteboy

    This seems to be the case in a lot of areas of government regulation. I have not seen any good suggestions on how to change this revolving door between industry and government regulators. I don’t think the loop can be broken, the only thing that can help is more transparency.

  • Michael Heath

    Akira MacKenzie writes:

    This is surprising? Barry marched into the White House promising Hope, Change, and to bring down the Banksters, then does…fucking nothing because they were afraid the economy would get worse. The paranoid in me likes to think Wall Street read Barry the riot act as he came into power: touch us and we’ll “Go Galt” and scuttle the economy. The realist says that Barry knows who fills his campaign coffers and that tossing corporate raiders into jail will hurt his future job prospects.

    America’s business is business.

    Wildly untrue. An incredible amount of energy went into both limiting the damage from the financial crisis and reforming the regulatory apparatus. Of course there are credible arguments not enough was done, I’m in that camp. But to claim what Akira states here is denialism at the level of a YEC or AGW denialist.

    And it’s President Obama, not “Barry”. That’s Just another demonstration of rhetoric consistent with the two denialist camps I name above.

  • Pierce R. Butler

    The Bush-Cheney administration prosecuted (and won) three major cases of high-finance chicanery.

    (For the curious: Enron, Allen Stanford, Bernard Madoff.)

    The Obama administration has attempted the same, just three fewer times.

    Michael Heath @ # 5: Let me FTFY – An incredible amount of energy went into both redistributing the damage from the financial crisis and limiting reform of the regulatory apparatus.

  • rabbitscribe

    This was the subject of a very recent NPR This American Life. And yes, Pro Publica is incredible.

  • freemage

    The NPR piece was downright chilling to listen to at points. They even took care to state for the record that the guy who was the most obstructionist (Carmen’s boss, something Silva) was, by all observed data, genuinely interested in blocking corrupt and unwise deals. But he undermined himself by focusing on building a ‘relationship’ with the G-S executives rather than the people he was responsible for regulating.

  • eric

    I have not seen any good suggestions on how to change this revolving door between industry and government regulators.

    Well I don’t know about good, but one method is to reduce the number of political appointments and increase the regular civil service positions at the leadership level. Even if they come from banking backgrounds, the folks who had to rise through the civil service ranks for 5-15 years before getting to leadership (and who have no intention of leaving their position in the next 2-4 years) will tend not to be so heavily biased towards the corporate world.

  • alanb

    Unfortunately, I live in an all-party consent state, which means that I can’t make surreptitious recordings like this without getting into trouble. Unless my name were Linda Tripp.