A year ago I wrote about ProPublica’s reporting on the case of Carmen Segarra who was fired by the New York Federal Reserve Bank, the institution charged with regulating the big Wall Street banks. Jake Bernstein of ProPublica now has another big story based on secret recordings made by Segarra.

Following the financial debacle of 2008, Columbia University finance professor David Beim was hired by the new head of the New York Fed William Dudley to investigate what went wrong and make recommendations for improvement. He was promised that he would be given full access and that the report would be confidential so that he could write freely.

In the end, his 27-page report laid bare a culture ruled by groupthink, where managers used consensus decision-making and layers of vetting to water down findings. Examiners feared to speak up lest they make a mistake or contradict higher-ups. Excessive secrecy stymied action and empowered gatekeepers, who used their authority to protect the banks they supervised.
“Our review of lessons learned from the crisis reveals a culture that is too risk-averse to respond quickly and flexibly to new challenges,” the report stated. “A number of people believe that supervisors paid excessive deference to banks, and as a result they were less aggressive in finding issues or in following up on them in a forceful way.”

One New York Fed employee, a supervisor, described his experience in terms of “regulatory capture,” the phrase commonly used to describe a situation where banks co-opt regulators. Beim included the remark in a footnote. “Within three weeks on the job, I saw the capture set in,” the manager stated.

Confronted with the quotation, senior officers at the Fed asked the professor to remove it from the report, according to Beim. “They didn’t give an argument,” Beim said in an interview. “They were embarrassed.” He refused to change it.

One result of Beim’s report was the hiring of Segarra as one of a set of ‘expert examiners’ to closely examine the workings of the banks and its relationship with the regulators and speak up when they saw things were not being run they way they should be. Her role was to look into Goldman Sachs. She was fired within seven months because she says she refused to tone down her criticisms of how the bank operated.

She sued for wrongful dismissal. But today ProPublica reveals that Segarra had been secretly recording over 46 hours of conversations during her time at the New York Fed, when these dealings with banks like Goldman Sachs were taking place, and they reveal the nature of the regulatory capture in which the banks essentially dominate the government agency that is nominally charged with regulating it. The recordings reveal that Goldman Sachs decided what regulations they wanted to follow and what they would ignore. One of the deals that Goldman was involved in was described as ‘”legal but shady”, a phrase that I think could be applied to practically all the activities of the big banks.

This is a complicated story. The radio program This American Life has teamed up with ProPublica to do a show on this and they are very good at making complex stories not only intelligible but also interesting. You can listen here and read the transcript here. They focus on how regulatory capture occurs and the insidious creation of a culture in the regulatory agency where employees are afraid of saying things that might anger the top bosses who were friends with the top executives of the big banks that they were supposedly monitoring.

We should note that Timothy Geithner was the head of the New York Fed from 2003 to 2009 during the period that led to the collapse. He was then appointed as Treasury Secretary where he oversaw the government bailout that was very generous with taxpayer money to the banks and basically rescued them from their own wrongdoing. He then left and is now president of a big private equity firm. A nice career trajectory for someone who has few useful skills but plenty of good contacts among the elite.

The banks and Geithner also got help from the Justice Department in protecting the executives, where attorney general Eric Holder and his deputy Lanny Breuer who was responsible for prosecuting Wall Street crimes carefully avoided prosecuting senior bank executives for fraud, opting instead for prosecuting the banks and getting fines that could be dismissed as the cost of doing business, without even getting admissions of wrongdoing. Breuer is now at the big corporate law firm of Covington and Burling. Eric Holder was also at Covington and Burling before he became Attorney General. Where do you think he is likely to end up now that he has announced his resignation?

We now have a society where there is one class of people who know they are immune from any prosecution for their crimes. They are too big to jail.