Investigate the Fed!
by Playthell Benjamin
The revelations of a former Bank Regulator with the Federal Reserve Bank of New York, Carmen Segarra, provides a shocking insider’s view of the unhealthy relationship between the nation’s top financial institutions – the Wall Street crowd that wrecked the US economy and sparked a global recession – and the Federal Reserve Bank of New York which is tasked with regulating them. Ms. Segarra, a highly qualified lawyer who holds degrees from Harvard, Cornell and Columbia universities, and has also studied international law at the Sorbonne in Paris, has not only spilled the beans about shady dealings between federal regulators and the mammoth Wall Street investment banking firm of Goldman Sachs, but has charged in court that she was fired for vigorously pursuing her duties.
Usually these kinds of shady dealings are inside stuff, the kind of secret palavers that never enter the public sphere; hence should a whistle blower go to the press it’s a “he says,”, “she says,” dispute. Ms. Segarra realized this, and took steps to negate that problem by secretly recording the meetings she had with her superiors. When she recognized what was happening, that bank regulators were still looking the other way at financial mis-dealings even after the great financial crash of the Bush years – she went to the Spy Store and purchased a miniature recording device that was easy to conceal and recorded 48 hours of meetings.
Ms. Segarra recognized that these kinds of massive organizations, whether government bureaucracies or private corporations, enjoy the services of powerful legal firms, while the whistle blower stands alone. When one considers the fact that taking such a stand means that one’s career in the industry is over because no one wants to employ a squealer, and the whistle blower is left with what they can get from suing the employer for wrongful termination, a process that can take years – which is the situation in which Ms. Segarra now finds herself now – it takes a person of heroic character to step forward with allegations of wrong doing.
However Ms. Segarra’s actions flowed from her motives for becoming a bank regulator. Whereas many of her colleagues viewed their position as a stepping stone to employment in the banking industry, Segarra took the job because she witnessed the financial devastation of her friends and family as a result of the Great Recession resulting from the Bush Administration’s policy of non-regulation of the financial industry.
After the passage of the Dodd-Frank Bill establishing a new regulatory regime on the nation’s financial institutions the FED hired a new group of regulators to vigorously enforce the new regulations. Ms. Segarra took one of those jobs in the belief that she could use her expertise to help fix our broken banking system. “I actually studied business law and regulation in law school.” She tells us. “I co-wrote a law review article on Y2K [the millennial computer bug], which ended up being published. As a result of that, my co-author and I were asked to work on setting up the Y2K legal and compliance program for a bank. I discovered early on that I enjoyed learning about a law and immediately applying it, much the same way that I enjoy learning and speaking a new language.” She speaks several languages by the way.
Ms. Segarra goes on to tell us “as a general practitioner, I have worked closely with a wide range of laws and regulations that apply across the banking and investment sectors, as opposed to just specializing in one particular type of law or regulation. As a bank examiner, you get to use that knowledge and those skills to evaluate what others have built, and, if and when necessary, point out ways to improve them.” However she would soon discover that there were obstacles in her path as she tried to do her job, and what was worse those obstacles were placed there by her supervisors, the very managers who were supposed to assist her in carrying out her duties – which was to put procedures in place that would help prevent another financial meltdown that could imperil the world economy.
She first noticed the lack of diligence on the part of FED regulators when she witnessed the Examiner embedded in Goldman Sachs make a statement that suggested the investment banking house was too big to be subjected to certain regulations they were charged with enforcing. Shocked by the comment she later questioned her manager about it and suggested that this was a situation she should look into. Instead of getting the enthusiastic green light she expected, the manager told her “you didn’t hear that.” A regulator from the FDIC, which insures the assets of depositors against bank failures up to $250.000, was also present in the room and she asked him if he had heard the comment and he assured her that he did.
Since she was lured to the bank examiner’s job by their mandate to investigate and monitor the practices of those very financial institutions deemed “too big to fail,” which the government had just spent hundreds of millions of tax payer dollars bailing out of the red in order to prevent the total collapse of the banking system, which would have ushered in a depression worse than the 1930’s, she was appalled by the attitude of the embedded regulator at Goldman Sachs and her supervisor.
Segarra was to discover that even after the passage of Dodd-Frank, which the disloyal Republican opposition who controlled the House of Representatives refused to fully fund, many of the same old practices that had permitted the kinds of shady financial dealings which led to the collapse was still going on. She would also come to realize that this problem was fostered by the close relationship between the regulators and the institutions they were supposed to regulate. The FED’s well-intentioned but misguided decision to embed regulators in the institutions they were watching over had resulted in overly friendly relations with the top executives of those institutions. And this led to a bending of the rules.
The extent of this cozy relationship had already been described in an independent 2009 report written by David Bind, a Columbia University professor of finance who had previously been a banker. Professor Professor Bind led an investigation into systemic problems that contributed to the financial crash; his report concluded that the regulators had failed to do their job of vigorously policing Wall Street to prevent them from engaging in risky or illegal activities.
Instead they had fallen into a condition that he calls “Regulatory Capture,” which resulted the bank “Examiners” treating the banks like “a watch dog who licks and intruder in the face and plays catch rather than bark at him.” Since the report had attracted so little attention Ms. Segarra does not seem to have been aware of it. But based on her experience the professor got in right.
The evidence Ms. Segarra has compiled on her secretly recorded tapes amount to a smoking gun with finger prints and DNA samples on the handle. It’s irrefutable! We hear her supervisors try and discourage her from following leads regarding wrong doing at Goldman Sachs – some of it blatant. For example she uncovered an acquisition in which Goldman Sachs was advising both sides for millions of dollars in fees, and the firm also had a large ownership share in one of the companies, in which her supervisor had a personal stake of several hundred thousand dollars. Carmen Segarra correctly flagged this as an egregious case of conflict of interests.
This led her to interrogate executives at Goldman Sachs about their conflict of interest policy and found that they had none. She thought this was incredulous, an outrage for a company that was conducting deals all over the world amounting to billions of dollars. How could a financial behemoth with global reach not have a clearly defined conflict of interest policy? If ever there was a situation that cried out for an investigation this was it!
Yet when she reported her discovery to her supervisor she was met with a lukewarm response bordering on indifference. She was told that this was her personal “perception” of the situation and the FED arrived at conclusions on important matters by “consensus.” She thought this was a ridiculous line of argument when the evidence of conflict of interests and the absence of any policy to deal with it was overwhelming. When she said as much she was told by her supervisor that she was considered “arrogant” by higher ups in the agency, and that if she wanted to advance in her career in the agency she should learn to become a team player. At which point Segarra asked outright if she was in danger of being fired for trying to do a good job. The supervisor sidestepped the question but made it clear that she was on the road to nowhere. And we hear it all loud and clear on the tapes! Ms. Segarra was eventually fired, and she is suing the New York Fed for unjustified termination.
Now that the tapes are being made public there is a growing outcry for an investigation of how the FED operates and their relationship with Goldman Sachs. The outrage is reflected even in that voice of the Wall Street establishment, The Wall Street Journal, which has denounced the preferential treatment given to certain gigantic Wall Street firms by both the FED and the federal courts. Carmen Segarra has opened a gigantic can of worms and provided us an unfettered view of what’s going down on The Street, which allows us to see the anatomy of a system that continues to produce financial crises that devastate the middle and working classes while the investor class continues to get richer.
It is even more important that the federal regulators do their jobs honestly and efficiently now than it was before the crash, because if a major banking institution fails now the government has less authority to bail them out. And as we are told in a New York Times article of September 30th 2014, it was the fall of Lehman Brothers that set the forces in motion that led to the world-wide financial panic. What is clear in retrospect as we learn from the Time’s extensive interviews with major players in the government who decided not to rescue Lehman Brothers – Ben Barnake, Federal Reserve Chairman, Tim Geithner, President of the New York FED bank, and Hank Paulson, Treasury Secretary – is that they had the authority to rescue Lehman and made a political decision not to.
Having already received scathing criticism from the left and the “free market” crowd on the right for employing the resources of the US Treasury to rescue Bear Sterns, a private investment firm, Freddie Mac and Fannie Mae – two giant government backed mortgage companies, in 2008, when FED Chairman Ben Bernanke approached him about rescuing Lehman Brothers Paulson refused, telling him that he did not want to become known as “Mr. Bailout.” However after the financial system crashed like falling dominoes from forces set in motion by the fall of Lehman Brothers, Paulson did indeed become “Mr. Bailout.” Hence it is frightening to learn from Ms. Segarra that it could all happen again because bank regulators are not doing their jobs.
That’s why we are blessed and highly favored to have an intrepid intellectual warrior and fearless defender of the working class and public interests such as Senator Elizabeth Warren, a former Harvard law professor – who is calling for a thorough investigation of the relationship between the FED, Goldman Sachs and other financial institutions. It is one of the most important issues of our times and it should be thoroughly investigated. Like Carmen Segarra, I too know honorable, law abiding people who were wiped out by the Bush Crash, including my sister Melba, a career educator and as fine a citizen as ever lived in America, whose life savings were ravaged!
So I not only support Senator Warren’s call for a congressional investigation, I think she should chair it. This would be a historical irony and poetic justice for those who torpedoed her chances of heading the regulatory agency she designed to regulate Wall Street bankers, now she’s baaaaack! And she has returned in an even more powerful incarnation; at least as a government regulator the reactionary Republicans in Congress would have exercised some authority over her; but as the Senator from Massachusetts they have none!
We should also make this an election issue. Let those who are opposed to an investigation into the dirty dealings of the avaricious plutocrats, and their unholy alliance with government shills, go on record with their opposition. I believe their ranks will be thin! Furthermore I think we should demand that President Obama appoint a special prosecutor under the auspices of a Department of Justice headed by a new Attorney General named Kamala Harris, the brilliant, beautiful, energetic Attorney General of California.
She would be the ideal Attorney General to oversee such a historic investigation because along with Bo Biden, the Delaware AG, Ms. Harris has been a leading figure in investigating and prosecuting financial institutions whose wrong doing led to the Bush crash that caused so many Americans to lose their homes and life’s savings. The lead investigator in this case would be Carmen Segarra and the Special Prosecutor would be former New York Governor Elliot Spitzer who was death on the Wall Street crowd when he was the New York AG. Nobody knows those scoundrels better and he is a ruthless prosecutor. This is my dream team… are you listening Chilly B?
Benjamin is a veteran political journalist out of Harlem NY. His essays can be read on his blog site Commentaries on the Times.