The secret Goldman Sachs tapes released this week by ProPublica and This American Life are attracting a lot of attention, and rightly so. They were clandestinely recorded by Carmen Segarra, an investigator for the New York Federal Reserve Bank who was eventually fired — either for being uncooperative or, as she says and the tapes suggest, for attempting to be a strong regulator.
Financial cases can seem complicated, especially in situations when there are multiple parties involved. But the reality that is revealed in these tapes is clear enough, and can be summarized in seven takeaways:
1. The New York Fed’s investigators are surprisingly fearful and defensive.
They’re called “regulators,” although the proper title for the Fed officials who monitor America’s banks is “supervisor.” When it comes to protecting our economy, they’re the cops on the beat. One of the striking things that these tapes make clear is that, rather than being forceful and assertive — in other words, rather than “supervising” — the Fed’s staff is defensive, diffident, and afraid to antagonize the bankers they oversee.
The tapes suggest that Mike Silva, Segarra’s boss, wants to do a good job. But he is constantly worried that Goldman Sachs executives might be upset or angered if Segarra or another member of his team becomes too aggressive.
This seems to reflect a culture that comes from higher up in the New York Fed. It’s a culture of submissiveness, not authority. As we will see, there are reasons for that.
2. “Regulatory capture” is real — and even worse than we thought.
Police officers aren’t known for negotiating their choice of words with the citizens they meet or arrest. But these tapes show that Mike Silva and other Fed officials are constantly negotiating the language in their own reports with the bankers they oversee.
This, and the fear that Fed officials display on these tapes, is a conspicuous example of “regulatory capture,” a phenomenon in which the officials who oversee the banks become “captured” by the culture, values, and opinions of the bankers they’re supposed to regulate.
Much of that capture is due to the fact that the only well-paying jobs available to ambitious regulators are frequently with the banks themselves. It can also be caused by the human tendency to please those with whom we work.
3. “Embedded” regulators face special challenges.
The problem becomes even worse when regulators or supervisors are “embedded” in the institutions they supervise, as Carmen Segarra was. They go to work, not in their own organizations, but in the offices of the banks they supervise. Most of the people they encounter throughout the day — in the elevator, at the coffee machine, the washroom — are employed by the institution they’re expected to investigate with a skeptical eye.
One Fed supervisor told a consultant that he had only been only working on an account for the in this way for three weeks when “I saw the capture set in.” He was talking about himself.
The tapes show that investigators like Carmen Segarra were rarely given reinforcement, encouragement, or a sense of team spirit. They were not provided with the emotional and logistical resources that might have helped counteract their isolation, loneliness, and identification with the subjects of their investigations.
4. Self-policing doesn’t work.
One of the great flaws in our bank regulatory system is its reliance on Wall Street institutions to police themselves and voluntarily report misbehavior to the proper authorities. The massive crime wave that led to the 2008 financial crisis demonstrated rather conclusively that these institutions are, as a rule, somewhat disinclined to do so.
This self-policing policy almost inevitably leads to the kind of diffidence displayed by Silva and other regulators. As one unidentified man says on the tapes:
“… we don’t want to discourage Goldman from disclosing these types of things in the future, and therefore maybe you know some comment that says don’t mistake our inquisitiveness, and our desire to understand more about the marketplace in general, as a criticism of you as a firm necessarily. Like I don’t want to, I don’t want to hit them on the bat with the head, and they say screw it we’re not gonna disclose it again, we don’t need to.”
“We don’t need to.”
If the regulators themselves don’t think that disclosure is a requirement for bankers, why would the bankers themselves?
5. The Fed’s governance structure is broken.
All of the country’s financial agencies suffer from “regulatory capture,” but the Federal Reserve has another problem. The Fed and its branches, which were created by the United States government, is run by boards largely composed of bank executives and their corporate allies. And the Fed isn’t just an oversight agency.
As a central bank, the Fed is a governmental institution that provides banks with vast financial resources — supposedly in return for compliance with government policies. But when bankers sit on its boards, it has powerful incentives not to look very carefully at its level of compliance.
Jamie Dimon, CEO of scandal-ridden JPMorgan Chase, sat on the Fed board that made the hiring and pay decisions for the its senior officials while Carmen Segarra was employed there.
6. Senators Warren and Brown are right. We need public hearings.
Senators Elizabeth Warren and Sherrod Brown reacted to the Segarra tapes by calling for public hearings into the New York Fed’s actions. “It’s our job to make sure our financial regulators are doing their jobs,” said Warren, who added:
“When regulators care more about protecting big banks from accountability than they do about protecting the American people from risky and illegal behavior on Wall Street, it threatens our whole economy. We learned this the hard way in 2008.”
They’re absolutely right. And while they’re at it, they should take a look at some of the other regulators, too. There is nothing in their record to inspire confidence.
There’s one final lesson to be learned from the release of these tapes:
7. Goldman Sachs is still run by dicks.
Pardon my language, but I think you’ll agree it’s justified. Take a look at its response to a reporter’s detailed list of questions regarding Segarra’s tapes. The reply, which appears to come from Goldman PR flack David Wells, flippantly ignores the questions and instead quotes several paragraphs of dialogue from one of those “captured” regulators.
When Segarra was assigned to Goldman, she was appointed to oversee a sleazy and disreputable institution with a record of fraud, deceit, and all-around bad behavior for which it had recently paid a then-record fine. In fact, only Jamie Dimon’s JPMorgan Chase — which is arguably more corrupt than Enron — may have exceeded Goldman in its sheer volume of disgraceful deeds. That’s an important fact to keep in mind when listening to her superiors equivocate and attempt to soften her language.
In an especially dickish move, Wells remarked that Segarra “unsuccessfully interviewed for employment with Goldman Sachs in 2007, 2008, and 2009.” Perhaps her interviewers found her too ethical for the job? Goldman, on the other hand, is apparently not too ethical to dig into its own personnel files in order to smear a critic.
This particular shot backfires against Goldman. That chronology means that Segarra applied there before joining the New York Fed. That distinguishes her from the many regulators who pursue high-priced banking work after they’ve treated banks with kid gloves. And in a field with limited career choices, her aggressive enforcement posture against Goldman demonstrates her willingness to sacrifice future opportunities in order to serve the public effectively.
As for Wells, his previous PR job was with none other than JPMorgan Chase. People like that are the reason we need people like Carmen Segarra.