Rare News Desk
[protected-iframe id=”d14f6d74df8a7a34f8e7cf23faded35b-46934866-60066902″ info=”https://w.soundcloud.com/player/?url=https%3A//api.soundcloud.com/tracks/170082367&color=ff5500&auto_play=false&hide_related=false&show_comments=true&show_user=true&show_reposts=false” width=”100%” height=”166″ scrolling=”no”]
Videos by Rare
Kurt Wallace: This is Kurt Wallace and our guest today on Rare is Jake Bernstein, investigative reporter for ProPublica. His article Inside the New York Fed Secret Recordings and a Culture Clash, reveals alarming inner workings of what has been happening at the Federal Reserve and banks such as Goldman Sachs and Jake, thanks for being with us today on Rare.
Jake Bernstein: Thanks for having me Kurt.
Kurt Wallace: Carmen Segarra is a central figure in this story and she was hired to do a job and then she ended up deciding to make secret recordings of what actually happen. Could you break down a bit of the story to set this up for us?
Jake Bernstein: Sure, happily. Well, after the financial crisis congress gave the Federal Reserve more authority over the most complex biggest banks out there the Goldman Sachs of the world. These are the banks who if they failed could take down the whole financial system. And in order to prepare for that the New York Fed started hiring examiners and they wanted specifically they wanted examiners with expertise. People who knew about certain areas of banking and could really sort of dig into those areas. And in his new wave of hiring they hired this woman named Carman Segarra and she seemed like the perfect kind of person for them. She’s a lawyer and she went to Ivy League schools and she speaks four languages. She’s been sort of looking at these banking areas for almost 15 years. So, she seemed like the perfect candidate. And they put her in Goldman Sachs the stations are there. They actually have lots of examiners who are stationed inside these banks.
And she started going about her examinations and she was kind of alarmed by what she started to see both at Goldman and from er own Fed colleges and how they were relating to Goldman. So, she began to secretly record them.
Kurt Wallace: Now in this what was surprising is that there was something called ‘regulatory capture’. There’s this culture of really reigning in what regulation means right?
Jake Bernstein: Yeah, I mean the word the phrase is ‘regulatory capture’ and what’s so ironic about this is after the financial crisis in 2009 the Fed brought in an outside consultant to do a top to bottom review of their supervision program of these banks and the outside consultant determined that the biggest sort of impediment or obstacle if you will to the Fed doing a successful job of regulating was their own culture. It was a culture that was marked by deference to the banks and a fear of speaking out. And the consultant actually recommended things they could do to improve. And one of those things was to hire expert examiners who would be outspoken, who would contradict their bosses, who would point out problems. And it seemed like that’s what they got with Carmen Segarra but they were not excited about it.
Kurt Wallace: In that, what was kind of alarming is that there were special privileges that the wealthy clients that the regulations didn’t seem to apply.
Jake Bernstein: Well, this is an interesting thing because basically what happened is there was a meeting with Goldman Sachs that basically was her job right to have meetings with Goldman Sachs and learn about their compliance programs. And one of the top people in one of the divisions in compliance said that he thought that wealthy clients were not covered in the same way that other clients might be. Now, she wasn’t sure exactly what he meant by that. So, what she said was this was a red flag it was something that I needed to go back and spend more time looking at. And when she sort of raised that issue with a fed colleague said this something that we clearly need to look in to just to see what he was talking about and if there’s a problem here the Fed colleague said you didn’t hear that. And the other regulators who were there was a regulator from the FDIC and regulator from the New York State banking authority said yes we did according to Segarra and one other person who was there. And then the Fed colleague said ‘well we didn’t mean that’ he sort of backtracked a little bit.
So, it’s not clear what was going on with Goldman in that instance but what it sort of indicated to Ms. Segarra was that there was an unwillingness on the part of her Fed colleges to really dig into this stuff.
Kurt Wallace: Let’s go into talking about Mike Silva. He and Carmen Segarra had exchanges that were somewhat in the way that this story is broken down it seems like there is a psychological nature to how he was approaching her and how to report compliance.
Jake Bernstein: Well, it was interesting. Early on in her tenure and there’s not a recording of this we just have her contemporaneous notes. She had a meeting with Silva and he basically the way according to her the way that he sort of couched it was as sort of mentoring feedback. He basically told her that perception was as important as reality at the New York Fed. And that she the best examiner, or the examiners who were respected the most were the quiet ones and that she just needed to be careful about how she was representing her views. And according to her she found the conversation very disquieting. And then a week before she was fired she had sort of a climactic encounter with Silva and his deputy in a meeting where Silva tried to get her to reverse her findings about Goldman Sachs.
Kurt Wallace: Now Goldman Sachs had a dealing with a Spanish bank on a special holiday in Spain she was aware of this. It sent a red flag up, Mike Silva had some strange reactions to this deal going down.
Jake Bernstein: Yeah, this was a deal where Silva wasn’t happy with the way it looked. Everyone sort of acknowledge that it was perfectly legal but he described it as legal but shady. And essentially what Goldman Sachs was doing was helping Santander there appear like it was better capitalize than perhaps it was for European regulators there was going through a stress test and so what Goldman did was they took some of Santander’s assets off its books and held on to them for a few years which meant that Santander didn’t need to hold as much capital against it.
Kurt Wallace: Some of the recordings were quite interesting. I want to play on and get your response to this part of the recordings actually from your audio highlights.
ProPublica audio highlights of Carmen Segarra’s secret tapes: Let’s look at it with our usual poker faces you know. I’d like these guys to come away from this meeting confused as to what we think. I want to keep them nervous. Does that make sense.
Kurt Wallace: Ok, so ‘we want them nervous, we want to keep our poker faces, we want to keep people confused.’
Jake Bernstein: Yeah this is kind of wonderful because the public never gets an opportunity to be in these rooms and this was Mike Silva sort of rallying his team before they went into a big meeting with Goldman Sachs to question executives about the Santander deal. He wanted to sort of, I think, put a little fear into them.
And what’s interesting is that at the end of the day it’s not really clear if they did anything about the deal, I mean they didn’t like it. But they didn’t – it’s not clear what they did. At one point they discussed whether to send a letter to Goldman saying that they’re unhappy about the deal and it’s not actually a letter that would require Goldman to do anything. It just would indicate that they weren’t happy in some way. And Silva says at the end of the day he felt like a lot had been accomplished simply because they had the meeting. As he says on the recording he says ‘I fussed at them pretty good and they were very very nervous.’
Kurt Wallace: Let’s talk about Carmen and her lawsuit some would speculate that this is possibly her being a disgruntled employee but you have all of these tapes you have all of this evidence. Where does this lawsuit go and what does it mean at the end of the day for the Fed?
Jake Bernstein: Sure, the lawsuit was tossed out by the judge. Basically the judge determined that the statute under which Segarra had filled the lawsuit didn’t apply to the facts in the case. And it’s a whistleblower statute that’s just for bank examiners and it says that bank examiners can’t be fired for finding that they do about laws or regulations. And the conflicts issue that Segarra was looking into – her examination. Was about a guidance of the Feds which Segarra argued was backed by laws and regulations but the judge determined that because it was a guidance and not officially a rule and regulation or law the fact that it didn’t apply so she threw the case out. Segarra and her lawyer believed that that was a mistake obviously so there appealing that. But yeah certainly she has a perspective for sure. But what’s amazing is that there are these recordings and so we can sort of check her perspective and sort of get bigger insight into both Goldman and the New York Fed that extends beyond her participation in the story.
Kurt Wallace: Do you think that in this story that there are takeaways that are going to expose a much deeper problem with the Federal Reserve and banks that it’s working with as far as potential collusion things that are very dangerous for the economy and the public at large?
Jake Bernstein: I think what the story tells us is that we need to have more insight into what the Fed and particularly the New York Fed is doing. There needs to be more oversight from somebody. Because their role is too important. They are the ones that are standing between us and these systemically important financial institutions. And it behoves the public to have a better sense of what kind of job they’re doing. And I also think that it sort of raises real questions about their culture and whether their culture is up to doing the kind of supervision that we need and expect from them.
Kurt Wallace: Well if this is just one individual that has experienced this there’s got to be much more happening. She was just there for a specific period of time and a specific place. But what about all the actions and activities of all the other eleven branches of the Federal Reserve? And then we have the interest on the American public on wanting to Audit the Fed and find out what they’re doing and where this money is being printed and sent to.
Jake Bernstein: Yeah, I think it does raise all kinds of questions and this is more focused on the supervisory side than the monetary side. I think a certain amount of independence on the monetary side is probably a good thing you know insulate that from politics. But on the supervisory side I mean that is you know the other regulatory agencies have a lot more oversight than the New York Fed does. And so I think that they should be held as accountable as the FDIC or the Office of the Comptroller of the Currency or any other agency that has this important task.
Kurt Wallace: Now the goal of this was to avoid another catastrophe like we had in 2008. Do you think that they’re missing the boat on the avoidance of another crisis?
Jake Bernstein: I mean this stuff is cyclical right and it’s hard to tell based on this one sort of case study. I think that it’s certainly a question. I think everyone is still kind of slightly on their best behavior. Because the financial crisis is still relatively recent. But I think this is exactly the time that we need to start paying attention to this stuff so they don’t miss the next one.
Kurt Wallace: Jake Bernstein thank you very much for being with us today on Rare.
Jake Bernstein: No, thank you Kurt I really appreciate it.
