Secret Goldman Sachs Tapes Put Pressure on New York Fed
October 6, 2014 by Nathaniel Popper and Peter Eavis
Wall Street’s top regulator is coming under new criticism for failing to adequately police the banks under its supervision, years after the financial crisis.
Lawmakers are scrutinizing allegations that the Federal Reserve Bank of New York went easy on one of the most prominent banks under its watch, Goldman Sachs, despite concerns voiced by those inside the Fed that a deal Goldman was pursuing was “legal, but shady.”
Now committees in the Senate and House of Representatives are looking at whether to hold hearings or conduct more extensive investigations into the Fed’s oversight of Goldman and other banks.
The renewed interest in the Fed’s role came after the release of secret recordings detailing interactions between employees of the New York Fed and Goldman, which were made public by the investigative news organization ProPublica and the radio program “This American Life.”
The former Fed employee, Carmen M. Segarra, who made the recordings had previously sued the New York Fed, arguing that she had been fired for being too hard on Goldman. While Ms. Segarra’s suit was dismissed, the newly released recordings suggest that her supervisor at the New York Fed went easy on Goldman, even after saying he wanted “to put a big shot across their bow” on a deal in which Goldman was suspected of helping make Banco Santander look financially stronger than it was.
William C. Dudley, president of the New York Fed, defended his agency’s oversight.Credit Rob Kim/Getty Images
The pressure on the New York Fed was apparent on Thursday when the head of the agency, William C. Dudley, came to the defense of his staff, unprompted, at the end of a speech at New York University.
“We will continue striving to improve, but I don’t think anyone should question our motives or what we are attempting to accomplish,” Mr. Dudley said.
Soon after the financial crisis, a report on the New York Fed’s practices by a Columbia University professor, David Beim, found that the regulator needed to be “willing to stand up to banks and demand both information and action” and was “too risk-averse to respond quickly and flexibly to new challenges.”
Mr. Dudley, the current president of the New York Fed, said on Thursday that after he received the Beim report in 2009, the agency’s bank supervision arm went through a “significant reorganization.”
But the conduct detailed in Ms. Segarra’s recordings came later, in 2012.
This week, three Democratic members of the House Committee on Financial Services — Representatives Maxine Waters of California, Al Green of Texas and Keith Ellison of Minnesota — wrote a letter to the committee’s chairman calling for a hearing on “whether adequate changes in management and workplace culture have taken place” at the New York Fed.
Senator Elizabeth Warren has called for a Senate Banking Committee hearing as well, and she said more scrutiny of the Fed was warranted.
“The tapes reveal a basic cultural issue: The Fed can identify problems, but can’t bring itself to make the banks fix those problems,” Ms. Warren said in a statement on Thursday. “We need congressional hearings to dig into what’s gone wrong at the Fed, and we need to do it now because our whole economy is riding on the Fed’s ability to supervise the biggest banks.”
The Senate Banking Committee is studying the issue and debating how it will proceed, according to a spokesman for the chairman of the committee, Tim Johnson.
“Chairman Johnson supports ensuring that regulators are vigilant in providing strong, independent oversight of financial institutions,” his spokesman said.
The concern over financial regulators — who are within a patchwork of different agencies that oversee the big banks — being “captured” by, or becoming too sympathetic with, the banks they supervise has been a recurring topic since the financial crisis. Some regulators physically work inside the banks they supervise.
But the New York Fed, one of 12 regional Federal Reserve banks, has always had unusually strong ties to Wall Street. It is in Lower Manhattan and has had Wall Street executives on its board, acting as advisers.
Since the crisis, the New York Fed has taken on a much broader role in regulating Wall Street, after firms like Goldman Sachs and Morgan Stanley were turned into bank holding companies. The government allowed the banks to change their status during the crisis so that they could gain full access to Fed assistance and thus avoid collapse.
Mr. Dudley was previously an economist at Goldman. Asked in an interview last year if that made it harder for him to be tough on the banks, he said, “I do not feel that I in any way hold any allegiance or loyalty to the financial industry whatsoever.”
Mr. Dudley has taken several steps to bolster the agency’s regulation of the banks. The number of supervisors overseeing the largest banks has doubled in recent years. And Mr. Dudley said on Thursday that the agency did not let its regulators stay too long on one bank.
Senior officials at the New York Fed say their oversight has played a central role in efforts to make big banks safer since the crisis. The Fed helps devise so-called stress tests that banks have to undergo each year. And it has led the overhaul of a vast short-term-debt market — called the tri-party repo market — that fell apart during the crisis and stoked the panic.
Mr. Dudley surprised some on Wall Street with a speech last year that took aim at recent ethical lapses at banks, like the scandals involving the rigging of financial benchmarks. “There is evidence of deep-seated cultural and ethical failures at many large financial institutions,” he said.
Goldman has faced particularly close scrutiny from regulators for the way it has handled conflicts of interest that exist between the bank and its customers. The Securities and Exchange Commission accused the bank soon after the crisis of selling financial products to customers while at the same time placing bets against the same products.
Goldman conducted an internal investigation of its policies, which resulted in a 63-page report on ways the bank could reform its practices. But a year after the report came out, a judge chastised the company for advising a company in negotiations with another company that Goldman partly owned. What’s more, a Goldman employee involved in the deal did not disclose that he owned a large stake in one of the companies.
Ms. Segarra, the New York Fed regulator who ended up being fired, complained that Goldman did not have a clear enough policy on conflicts of interest.
On the day that the ProPublica article came out, Goldman announced changes to its conflict-of-interest policy that barred investment bankers from holding stock in individual companies, among other things.
A spokesman for Goldman said the timing of the changes was not related to the ProPublica piece.
The company said in a statement that it “has long had a comprehensive approach for addressing potential conflicts.”
© Earl Wilson/The New York Times: Carmen Segarra, a bank examiner who was fired by the Fed.
