Carmen Segarra is a former New York Federal Reserve bank examiner who butted heads with her bosses over her policing of Goldman Sachs.
Segarra alleges that her attempts to discipline Goldman Sachs were blocked by her bosses at the New York Fed, who she suggests were intent on giving Goldman Sachs no trouble. The Fed disputes her allegations, as does Goldman.
Segarra’s case raises a host of questions about “regulatory capture”, the term for regulators who become too cozy with the industry they are meant to police.
The issue of capture is “very dismaying”, said Anat Admati, a finance and economics professor at the Stanford Graduate School of Business. “But it’s good to open the discussion.”
The system of bank supervision creates tight bonds between supervisors and their charges at big banks. Several bank regulators, including the Federal Reserve and the Office of the Comptroller of the Currency, oversee banks by embedding examiners within the banks themselves, carving out small – if often isolated – offices. The “co-workers” that the examiners see most often every day are employees of the bank. The examiners have limited access to the banks’ financial information; they depend on employees of the bank to flag any problems.
This arrangement can create a sense of friendliness as well as envy among bank examiners of the better-paid they supervise, critics say. Many former bank examiners end up working for the banks they once monitored.
“[These examiners] sit in the same office [as bankers] and they’re paid differently. They depend on the bank for information and to know exactly what they can do,” said Admati.
“People don’t go to work for regulators to actually regulate Wall Street,” said Lance Roberts, general partner of wealth management firm STA Wealth. “They do it so that they can go to work for a Goldman or another bank.”
Segarra was hired by the New York Fed in 2012 to examine Goldman Sachs’ policy on conflicts of interest, which govern the ethics of the firm’s dealing with its clients.
The tapes – many muddy in sound – reveal that Segarra clashed with her bosses as she attempted to write an official critique of why Goldman Sachs had no policy on conflicts of interest. Her bosses at the Fed are on tape urging her to abandon her insistence that the policy did not exist, and say instead that the bank had a “bad” policy. The exchanges have a sharp tone.
“In light of your repeated and adamant assertions that Goldman has no written conflicts of interest policy, you can understand why I was surprised to find a ‘conflicts of interests section’ in Goldman’s code of conduct that seemed to me to define COIs, prohibit COIs, and instruct employees what to do about COIs,” one of her supervisors wrote to Segarra.
Segarra released the tapes to the radio program This American Life and the investigative publication ProPublica. Bloomberg columnist Michael Lewis, an influential author, has called the tapes “the Ray Rice tapes of finance”, referring to the recent video that showed the Baltimore Ravens star punching his then-fiancee.
The New York Fed released a two-page statement disputing Segarra’s account, saying it “categorically rejects the allegations” and that its examiners “are encouraged to speak up and escalate any concerns they may have about the New York Fed or the institutions we supervise.”
Goldman Sachs, for its part, responded with a statement that the bank “has long had a comprehensive approach for potential conflicts.”
As Segarra was embattled in her job at the Fed, she secretly recorded conversations with her supervisors in hopes of showing that they were pressuring her to tone down her critique of Goldman Sachs. Segarra was fired in 2013 after only seven months of work.
The cause of Segarra’s dismissal is a matter of bitter legal dispute. Segarra sued the Fed after she was fired, claiming her questioning of Goldman Sachs rankled her bosses, who allegedly wished to be friendly to the bank. The Fed has countered that her termination was “on performance grounds”. A district court ruled in favor of the Federal Reserve. Segarra has appealed the decision.
Goldman, in its statement, implied that Segarra’s case was a matter of sour grapes from a rejected job candidate. The bank said Segarra applied for a job at the bank for three years in a row between 2007 and 2009 – three years before she took a job at the Federal Reserve. Segarra, a lawyer who has worked for banks including Citigroup in the past, has said that she applied to a number of banks.
Roberts of STA Wealth, said that the financial crisis made regulators protective of banks rather than aggressive in policing them.
“The major banks have held the government hostage for years,” Roberts said.
There have been several other examples of conflicts between banks and their regulators.
JP Morgan, for instance, fought bitterly with its regulator, the Office of the Comptroller of the Currency, over a $6bn loss that was known as the “London Whale trade”.
In that case, which was the subject of a Senate hearing and investigation, it emerged that the OCC regulators faced strong resistance from bank executives including CEO Jamie Dimon, who allegedly feared that the bank’s sensitive financial information would be leaked.
According to the testimony of the OCC regulator, Dimon “raised his voice” to the bank examiner who questioned why the bank was not sending regular financial reports, which are required. The investigation also showed that JP Morgan allegedly misinformed the OCC, estimating $580m in losses. At the time, JP Morgan’s numbers showed a potential loss of $1.2bn.