The Federal Reserve Bank of New York says it “categorically rejects” allegations made by a former examiner that the Fed has become deferential to America’s biggest banks and fails to effectively regulate them.
The report critical of the Fed is driven by secret recordings made by New York Fed bank examiner Carmen Segarra, who was fired after just seven months on the job.
She had been stationed inside Goldman Sachs in 2012, as is the practice for all Fed examiners. She alleges she attempted to make constructive criticism of the bank, only to be contradicted and eventually fired by Fed managers.
'Absence of exercise of power'
"I think it would've been just as scary if I had gone in there and found like an aggressive Fed that was really mean and sort of you know trying to nitpick,” she told This American Life.
“I think that all that power sort of being abused, that's a very scary thing. But when you find the opposite, the absence of exercise of power, the absence of the exercise of responsibility, then you are just like, this is a problem, because you've been made the overarching regulator, and the country is looking to you to make things better after the crisis, and if you can't do it, then we need to talk about who can."
The New York Fed denies Segarra was fired for failing to be deferential to Goldman, saying the firing was “based entirely on performance grounds, not because she raised concerns as a member of an examination team about any institution.”
Regulator defends role
The Fed defended its role in regulating Goldman Sachs in a statement posted on its website today.
“The New York Fed works diligently to execute its supervisory authority in a manner that is most effective in promoting the safety and soundness of the financial institutions it is charged with supervising,” it said.
Segarra, who lost a wrongful dismissal case against the Fed, said she began taping meetings with Goldman executives and Fed managers after finding an alarming level of compliance with the bank by the regulator.
Among her allegations:
- She heard a Goldman executive say "once clients were wealthy enough, certain consumer laws didn’t apply to them," a statement recorded in the meeting’s minutes. When she raised the issue with a Fed manager, he told her the executive did not say that, or if he did, he didn’t mean it.
- A deal by Goldman to take over risky assets from Spanish bank Santander was not properly disclosed to the Fed, but managers did not follow through to reprimand the bank.
- In 2012, Goldman was rebuked by a Delaware judge for its behaviour during a corporate acquisition. Goldman had advised one energy company, El Paso Corp., as it sold itself to another energy company, Kinder Morgan, in which Goldman actually owned a $4-billion stake. Segarrra asked questions and was told by a Goldman executive that the bank did not have a conflict of interest policy. The Fed found some divisions of the bank did have a policy, though not a comprehensive one. The Fed pressured Segarra not to mention the inadequate conflict of interest policy at Goldman in her reports and, she alleges, fired her after she refused to recant.
ProPublica reporter Jake Bernstein, who previously won a Pulitzer for his investigative reporting on Wall Street, points out a 2009 probe of the Fed by Columbia University professor David Beim that also found a culture of compliance with the big banks.
That probe was meant to determine why the Fed, which regulates the banks by stationing its examiners inside the institutions, failed to foresee the problems that led to the 2008 financial crisis.
“The New York Fed had become too risk-averse and deferential to the banks it supervised,” Bernstein wrote.