“The Ray Rice video for the financial sector has arrived,” Michael Lewis declared in a column on Bloomberg View this morning. He’s referring to new recordings reported by ProPublica’s Jake Bernstein that look at how bank supervisors soft-pedaled their oversight of Goldman Sachs (GS). The audio recordings were made by Carmen Segarra, a former examiner with the New York Fed who was detailed to the team supervising Goldman in 2011 and 2012. The story, which is also the subject of a full episode of This American Life that airs today, provides an unprecedented look into how bank examiners—the front lines in ensuring the safety and soundness of the financial system—at times defer to the banks they are supposed to oversee.
When Segarra felt her aggressive stance toward the bank was getting her into trouble with her bosses, she bought a tiny audio recorder and began taping her meetings. All told, she caught about 46 hours on her recordings. These two examples of what the recording, made in internal meetings when the Fed interacted directly with Goldman, show what happens when Fed supervisors try to push back on the bank.
Conflicts of interest: The story says that over the course of many months, Segarra determined that Goldman had no formal documents that would come close to what the Fed considered to be a conflict-of-interest policy. In a recording, she asks a Goldman executive whether the bank has a written “definition of a conflict of interest, what that is, and what that means.” The executive responded, “No.”
As Segarra was preparing to take formal action against the bank over the lack of a conflict-of-interest policy, her supervisor pushed back, asking why she was so adamant in saying the bank had no policy. “Why can’t we just say they have basic pieces of a policy but they have to dramatically improve it?” a supervisor said. Segarra relented eventually, saying she’d go along with that plan, but that, between the two of them—and the tape, we now know—“professionally, I cannot agree.”
A week later, Segarra was fired. She says it was because of incidents like this, while the Fed says her termination was “based entirely on performance grounds.” (Segarra sued the bank for wrongful termination. A judge threw the suit out earlier this year on procedural grounds.)
What the Fed considers putting pressure on Goldman: The investigation includes recordings of how the supervisors reviewed a deal Goldman did with the Spanish bank Banco Santander (SAN:SM). In the deal, Goldman temporarily took liabilities off Santander’s books, a move that let Santander look more stable to its own regulators. ”My own personal thinking right now is that we are looking at a transaction that’s legal but shady,” said the Fed’s lead supervisor at Goldman.
The supervisor wanted to push back a bit and sounds upset that the bank didn’t get the Fed’s OK in advance of the deal, as the early drafts of the deal documents said was required. “The one thing I know as a lawyer is that they never got from me a no objection” letter, he said. He said he wanted to raise the issue like a “big shot across their bow”—in essence, as a warning. But in the long meeting with the bank, the only time he raises the issue about the preapproval—his big chance to stand firm—all he says is, it “sounds like that dropped out at some point or …,” and he trails off.
In a long response, the New York Fed “categorically rejects the allegations” made in the stories and says it has numerous places employees can turn if they think their opinions are not being fairly heard, including “the Ethics Office, employee hotline and internal ombudsman.” Goldman’s three-paragraph statement dealt only with the questions about the conflict of interest. It says it has “a comprehensive approach for addressing potential conflicts” that can be found by “a quick Google search.” What can’t be found on a Google search, until now, was what deference sounds like inside a bank and its examiners.
