Regard this as a public service. It is rare that we get a real glimpse of the way the world works, but in the last week we have — in the case of Carmen Segarra. Ms. Segarra was born in Indiana, raised largely in Puerto Rico, graduated from Harvard, got law degree from Cornell, is fluent in five languages and worked for 13 years for banks like Citigroup and Societe Generale.
In 2011, as the New York Federal Reserve staffed up to enforce Dodd-Frank, she was among those hired as a bank examiner. She lasted seven months before being fired. Her story can be found on the ProPublica website and can be heard in an episode of NPR’s “This American Life.”
Banks were at the center of the financial meltdown of 2008, as they had been in the crash that ushered in the Great Depression. The repeal in 1999 of the Glass-Steagall Act of 1933 and other Depression era regulations made the next crash more likely. When it came, Dodd-Frank was part of the legislative response. Banks were to be held to higher standards and the Fed was to be instrumental in enforcing these new strictures.
What Segarra found when she was assigned by the Fed to Goldman Sachs was a textbook case of what’s known as regulatory capture. The regulators of an industry get so cozy with the industry, perhaps sniffing future opportunities on the other side of the table, that they cease to regulate and become enablers.
According to Segarra, the leader of her team would boast that he would be tough when they met with Goldman, but would actually behave like a pussy cat. In a meeting a Goldman representative casually remarked that “once clients are wealthy enough certain consumers laws don’t apply to them.” After the meeting, Segarra questioned this dubious proposition. She was told by her Fed superior, “You didn’t hear that.”
But she did hear it and a lot more. And she was inclined to say so. This got her more than one reprimand. She was told her colleagues thought she was not a team player. Wasn’t collegial. Had sharp elbows. Didn’t go along to get along. One would have thought those were exactly the traits one would seek in a regulator, but the Fed she found was far more interested in being chummy than in enforcing the law.
The last straw came in several case in which Goldman seemed to have a clear conflict of interest. For example, acting for a company while having a contrary and undisclosed financial interest at odds with that of the company. When these came to Segarra’s attention, she asked to see the Goldman conflict of interest rules. They had none, despite the fact that they are required by law to do so and adhere to them.
She insisted with her superiors that Goldman was in violation. They told her not to include such a statement in the report she was writing. She refused and was fired. So far, this might be thought of as a case of “She Said,” “Fed Said” — except for one little detail.
Segarra, seeing the way the wind was blowing, had begun recording meetings with Goldman executives and Fed colleagues — 46 hours of them. The ProPublica report is based on them and you can hear hem on “This American Life.” They are damning to the Fed and Goldman and vindicate Segarra. Unfortunately, being right may not be enough to assure her a happy future. The usual fate of whistleblowers isn’t happy. Doing the right thing is often unrewarding. But she is a heroine and deserves to be regarded as such.
In August of 2009, New York Fed President William Dudley commissioned a report on what went wrong at the Fed during the recent meltdown and what could be done to prevent a rerun. It was overseen by Columbia finance professor David Beim. The Beim Report found that the problem was the culture within the Fed.
As described by ProPublica, the report made the case that the Fed had “become too risk-averse and deferential to the banks it supervised. Its examiners feared contradicting bosses, who too often forced their findings into an institutional consensus that watered down much of what they did.
“The report didn’t only highlight problems. Beim provided a path forward. He urged the New York Fed to hire expert examiners who were unafraid to speak up and then encourage them to do so. It was essential, he said, to preventing the next crisis.”
That’s the reason Segarra was hired, but when she behaved as intended it was also the reason she was fired. The rules had changed, but the culture hadn’t. The regulators were still captives. Michael Lewis, the long time chronicler of Wall Street hocus pocus in books like “Liar’s Poker,” “The Big Short,” and “Flash Boys,” has taken notice of the Segarra contretemps in a piece on bloombergview.com.
Lewis concludes that “the Fed encourages its employees to keep their head down, to obey their managers and to appease the banks. That is, bank regulators failed to do their job properly not because they lacked the tools but because they were discouraged from using them.” He also notes that a $150,000 a year Fed minion may be no match for a $1.5 million a year Goldman swashbuckler, especially if the former harbors hopes of someday heading for those greener pastures. Why rock the boat?
You may have noticed a lot of news coverage of Ebola and Ray Rice and midterm elections lately, but very little of Carmen Segarra, Goldman and the Fed. Still, the greater risk to America’s future well-being may come from the next Wall Street catastrophe. And if no one is bothering to enforce the regulations, it may not be long in coming.