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Former Fed Bank Examiner Says Secret Tapes Show Fed Leniency

Sep 26, 2014
Originally published on September 26, 2014 10:43 am

The Federal Reserve is among the most powerful institutions in the nation and also among the more private. But new audio tapes secretly recorded by a former employee provide a rare look into meetings involving officials from the Federal Reserve Bank of New York.

In them, you hear officials considering how to oversee Goldman Sachs, and specifically, they discuss a financial transaction that one official describes as "legal but shady."

The recordings were made in 2012 by Carmen Segarra, who at the time was a New York Fed bank examiner, charged with making sure banks followed the rules. She felt the Fed was going too easy on a powerful and very well-connected investment bank. She was later fired. She sued the Fed, which made some news.

Segarra recorded 46 hours of meetings using a small audio recorder on a key chain. She gave those recordings to Jake Bernstein, an investigative reporter from ProPublica, and to the public radio program, This American Life.

The concern being raised by the recordings, Bernstein tells NPR's Steve Inskeep, is that regulators may be too cozy with the banks they oversee.

"These are people who work inside the banks. They see these people every day, and they need to obtain the information from these banks, and it's easier to obtain the information if you're friendly and if you have a good relationship, but sometimes that can slide to deference," Bernstein says.

Goldman Sachs says that the concerns raised in Segarra's examination were off base.


Interview Highlights

On the former Fed bank examiner who made the recordings

Carmen Segarra is a lawyer. She had about 15 years of experience helping banks comply with rules and regulations, and then after the financial crisis she applied for a job at the New York Fed because she says that she wanted to do something that would help the financial system and help prevent these kinds of things from happening in the future.

On the deal that Mike Silva, the head Fed official inside Goldman, is recorded as describing as "legal and shady"

This was a deal between Goldman Sachs and a Spanish bank called Banco Santander. Banco Santander's European regulators were telling it to hold more capital [in case the investments go wrong].

And so what Goldman was doing was they were taking some of the assets off of Santander's books. They were going to hold them for a few years, which would let Santander hold less capital.

...

[Silva] wants to question Goldman executives about this deal and ask some sharp questions. He's got some concerns. ... Although the deal is legal, there is one thing about the deal that seems to require an explanation. Goldman had a clause in the agreement that said that they needed to obtain a "no objection" from the Fed for the deal – so essentially it seemed like the Fed had to sign off on the deal before it was closed, but as Silva says, he doesn't feel like he got that sign off:

My own personal thinking right now is that we're looking at a transaction that's legal but shady. I wanna put a big shot around their bow on that. Poking at it, maybe we find something even shadier than we already know. So let's poke at this thing, let's poke 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 about it. I wanna keep 'em nervous.

But when Fed examiners met with Goldman about the deal, Segarra's recordings show that Silva gently brings up the clause only once

That's the only time that Silva asks about the no-objection issue. Goldman did mention it in the meeting, and they said that the clause didn't actually mean what it appeared to say, and they in fact didn't require a no objection from the New York Fed.

On who, besides Segarra, says the Fed has been too gentle on the banks

The Fed did. They commissioned a report in 2009 that said the biggest problem at the Fed was its own culture – the deference, the fear of speaking up and suggested that they hire expert examiners who would speak out and contradict their bosses – people like Carmen Segarra.

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STEVE INSKEEP, HOST:

We have this morning an unprecedented chance to listen to the inner workings of the Federal Reserve. It's among the most powerful institutions in the nation and also among the most private.

AUDIE CORNISH, HOST:

A former employee recorded meetings involving officials from the Federal Reserve Bank of New York. In them, you hear officials considering how to oversee Goldman Sachs.

(SOUNDBITE OF ARCHIVED RECORDING)

UNIDENTIFIED MAN: We're looking at a transaction that's legal but shady.

CORNISH: Legal but shady, says a Fed official of a financial transaction. We'll hear much more of that recording in a moment.

INSKEEP: These recordings were made by Carmen Segarra in 2012. At the time she was a New York Fed bank examiner and she felt the Fed was going too easy on a powerful and very well-connected investment bank.

CORNISH: She was later fired. She sued the Fed and this made some news. What we're revealing for the first time is that Segarra secretly recorded 46 hours of meetings.

INSKEEP: She gave those recordings to an investigative reporter from ProPublica and to the public radio program This American Life, which we'll play them at length this weekend. Reporter Jake Bernstein is with us. Welcome to the program.

JAKE BERNSTEIN: Thank you for having me.

INSKEEP: Just so we have it on the table here, what is the concern that is being raised by these recordings? Is it some kind of massive corruption?

BERNSTEIN: There's no corruption here where people are being passed wads of cash not to do their job. This is really what people describe as regulatory capture - this idea that the regulators are too cozy with the banks that they're actually regulating.

INSKEEP: So they're not pushing hard enough when they see things that concern them, legal but shady transactions, to use that phrase we heard in the tape.

BERNSTEIN: And it's completely understandable. These are people who work inside the banks. They see these people every day and they need to obtain information from these banks. And it's easier to obtain the information if you're friendly and if you have a good relationship. But sometimes that can slide to deference.

INSKEEP: So one of these people who was supposed to be examining Goldman Sachs was Carmen Segarra. Who is she?

BERNSTEIN: Carmen Segarra is a lawyer. She had about 15 years of experience helping banks comply with rules and regulations. And then after the financial crisis, she applied for a job at the New York Fed because she says that she wanted to do something that would sort of help the financial system and help prevent these kinds of things from happening in the future.

INSKEEP: OK, so she comes there at a time when the country is focused on stricter regulation of financial institutions and the dangers of financial institutions that get out of control. She's in the Fed for a few months and she gets involved in one particular deal. We heard that reference to that deal that was described on the tape, at least, as legal and shady. What was it?

BERNSTEIN: Yeah, this deal shows up in discussions throughout her tapes. It was a deal between Goldman Sachs and a Spanish bank called Banco Santander. And Santander was being required by its regulator in Europe to hold more capital, a cushion in case, you know, things go wrong.

INSKEEP: This has been a big deal since the financial crisis, that institutions are supposed to have the equivalent of cash on hand in case of a crisis.

BERNSTEIN: Exactly. And so what Goldman was doing was they were taking some of the assets off of Santander's books. They were going to hold them for a few years, which would let Santander hold less capital.

INSKEEP: OK. So this transaction is happening. Carmen Segarra, among other people at the Fed, find out about it. And this is a point where Carmen Segarra is already questioning the strength of her colleagues at the Fed, the strength of their effort to oversee Goldman. And she's making recordings, which we're about to play some of one. What's on this tape?

BERNSTEIN: We're about to listen to Mike Silva. He's the head Fed official inside Goldman Sachs and he wants to question Goldman executives about this deal and ask some sharp questions. He's got some concerns.

(SOUNDBITE OF ARCHIVED RECORDING)

MIKE SILVA: My own personal thinking right now is that we're looking at a transaction that's legal but shady. I want to get - I want to put a big shot across their bow on there, poking at it, maybe we find something even shadier than we already know.

INSKEEP: OK, you hear him say I want to put a shot across their bow - I want to warn them that there is a problem here. Than he goes into the meeting with Goldman, as other Fed regulators do, and there's tape of that. What happened in that meeting?

BERNSTEIN: Well, he's got - although the deal is legal there is one thing about the deal that seems to require an explanation. Goldman had a clause in the agreement that said that they needed to obtain a no objection from the Fed for the deal. So essentially it seemed like the Fed had to sign off on the deal before it was closed. But as Silva says he doesn't feel like he got that sign off.

INSKEEP: Silva is saying Goldman took me for granted and just assumed I would approve this. They didn't get my approval. He's got something to really question them on. So did he push Goldman when he finally met with the bank?

BERNSTEIN: Well, you can listen to the question yourself and make that determination.

(SOUNDBITE OF ARCHIVED RECORDING)

SILVA: Just to button up one point, I know the term sheet called for a notice to your regulator. The original term sheet also called for expression of non-objection, sounds like that dropped out at some point or...

INSKEEP: Sounds like that dropped out at some point. Is that the only question that was asked in that long meeting?

BERNSTEIN: Yeah, that's the only time that Silva asks about the no objection issue. Goldman did mention it in the meeting. And they said that the clause didn't actually mean what it appeared to say and that, in fact, they didn't require a no objection from the New York Fed.

INSKEEP: OK, so Goldman Sachs is doing this big transaction. Fed officials notice a problem. They want to really question it. They go into the meeting with Goldman and they barely raise it. And Carmen Segarra keeps right on recording. After this meeting with Goldman, what did Fed officials say, if anything, about why they didn't press their own concern?

BERNSTEIN: Well, they go back to their own floor on Goldman Sachs and they start talking about the meeting, the no objection doesn't really come up at all. But they start expressing their feelings about how far they should push Goldman Sachs.

(SOUNDBITE OF ARCHIVED RECORDING)

MAN: I think we don't want to discourage Goldman from disclosing these types of things in the future. And therefore maybe, you know, some comment that says don't mistake our inquisitiveness and our desire to understand more about the marketplace in general as a criticism of you as a firm necessarily. Like I don't want to...

SILVA: Well, I've been very clear with them...

MAN: I don't want to hit them on the bat with a head and then say screw it. We're not doing this again. We're not going to disclose this again. We don't need to.

INSKEEP: So they're saying we need to be gentle with Goldman Sachs.

BERNSTEIN: Yeah, Segarra says that she saw this a lot. That there was a fear that if you pushed Goldman too far they wouldn't give information to the Fed, which she didn't understand because Goldman is obligated to give information to the Fed when it asks for it.

INSKEEP: OK, now Carmen Segarra, we should say, has since been fired from the Fed. She sued saying that she was fired because she was considered too aggressive. What is the Fed saying about her case? And what is Goldman saying about all this?

BERNSTEIN: The Fed says that the decision to terminate Segarra's employment was based entirely on performance grounds and not for any concerns that she raised about Goldman Sachs in her examination. Goldman Sachs says the concerns that Segarra raised in her examination were off base.

INSKEEP: I want to emphasize that even though you have dozens of hours of recordings here, secret recordings, what you have is a snapshot in time of an incredibly difficult and long-running job of regulating banks. So I just want to ask you, Jake Bernstein, is there anyone besides Carmen Segarra, the woman who made these recordings, who says the Fed has just been too gentle on the banks?

BERNSTEIN: Actually the Fed did. They commissioned an outside report in 2009 that said that the biggest problem at the Fed was its own culture, the deference, the fear of speaking up. And suggested that they hire expert examiners who would speak out and contradict their bosses - people like Carmen Segarra.

INSKEEP: Jake, thanks very much.

BERNSTEIN: Thank you.

CORNISH: That's reporter Jake Bernstein with ProPublica. You can hear much more of this story this weekend on WBEZ's This American Life and find it at thisamericanlife.org. Transcript provided by NPR, Copyright NPR.