The 16 Most Important Facts About The Startling New Accusations About The New York Fed

Propublica and This American Life published a massive report alleging severe conflicts of interest between the New York Federal Reserve and Goldman Sachs.

“The Ray Rice video for the financial sector has arrived,” Michael Lewis said.

The report is driven by secret recordings that suggest that the NY Fed regulators were too soft on Goldman, and therefore possibly other banks as well.

The recordings come from now former New York Fed bank examiner Carmen Segarra, who was fired after just 7 months on the job.

The article is nearly 6,000 words long and the podcast runs for over an hour.

And there’s lots of background.

We read and listened. Here are the 16 important pieces of information from the story.

Here they are:

1. Back in 2008, the NY Fed hired a Columbia University finance professor, David Beim to conduct an “unlimited access” and totally secret investigation of the NY Fed. Basically, he was to investigate how the Fed failed to catch the financial meltdown, and how it might do a better job in the future.

2. Beim interviewed “dozens” of New York Fed employees and found that the Fed’s biggest problem was its own culture: he said that the NY Fed was too submissive to the big banks it was supposed to supervise.

In his report, Beim also notes that Fed employees were afraid of contradicting upper level management WITHIN the Fed. He writes in his report:

“[Fed employees] don’t want to be too far outside from where management is thinking. The organisation does not encourage thinking outside the box. After you get shot down a couple of time, you tend not to go there anymore. Until I know what my boss thinks, I don’t want to tell you.”

3. Beim offered the NY Fed advice for the future: it must hire expert examiners “who were unafraid to speak up” in order to prevent the next crisis.

4. Fast forward one year: the Congress gave the Federal Reserve “even more oversight authority.” So the NY Fed started to hire people to examine the big banks since they could potentially hurt the financial system again.

5. Carmen Segarra, an experienced lawyer, was one of the people who was hired. And she got placed in Goldman Sachs.

6. And then, she was fired after only 7 months on the job.

7. So last year Segarra sued the NY Fed. She claimed that she was fired because she refused to “back down” from her negative finds about Goldman Sachs.

8. The case was thrown out this year without ruling on the merits, saying “the facts didn’t fit the statute under which she sued.”

9. But here’s the fun part: Segarra secretly recorded audio while she was working at the NY Fed. She was “worried about what she was witnessing” and wanted to have evidence of the inside goings-on “in case the events were disputed.”

She talks about a meeting with Mike Silva, a senior Fed official stationed at Goldman, who has been working there for almost 20 years:

“He started off by talking about how he wanted to give me some mentoring feedback. And then he started talking about the importance of credibility. And he said, you know, credibility at the Fed is about subtleties and about perceptions, as opposed to reality.

10. All together she recorded 46 hours of meetings and conversations. And what’s fascinating about these recordings is that Fed deliberations are rarely public — they’re confidential by regulation.

11. Her recordings allegedly show that, despite all of Beim’s suggestions, the NY Fed didn’t change its culture. It was still submissive to the big banks.

An unidentified man says on the recording:

“We’re not obligating them to do anything necessarily.”

Segarra says the following about this type of culture:

“I think it would have been just as scary if I had gone in there and found like an aggressive Fed that was really mean and sort of you know trying to nitpick. I think that all that power sort of being abused, that’s a very scary thing. But when you find the opposite, the absence of exercise of power, the absence of the exercise of responsibility, then you are just like this is a problem because you’ve been made the overarching regulator, and the country is looking to you to make things better after the crisis, and if you can’t do it, then we need to talk about who can.”

12. And in Segarra’s case specifically, the NY Fed was submissive to Goldman. Her recordings allegedly show that it had a hard time establishing its authority, and was “reluctant to push hard against Goldman” at times.

An unidentified man on the recording says:

“I would add to his comments in that 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, I don’t want to hit them on the bat with the head, and they say screw it we’re not gonna disclose it again, we don’t need to.”
13. Segarra wasn’t willing to conform to the status quo while she was working for the NY Fed, and was often outspoken about her “negative” findings. Colleagues apparently would her “abrasive” and then complained, according to ProPublica.

Segarra’s supervisor, Jonathan Kim said to her:

“I want you to be successful. Ok? There are — there’s information coming in, there’s opinions that are coming in. Right? … it’s really about how you are perceived, right? So if there’s more a general sort of feedback that says that it’s not only one person, it’s not only two persons, but many more people who are perceiving that you’re — um, you have more sharper elbows, right? Or that you’re sort of breaking eggs. I think the message has come back to me saying you know that you really need to make these changes quickly in order for you to be successful —.”

14. Segarra’s boss, according to the report, repeatedly tried to get her to change her conclusion that Goldman “was missing a policy to handle conflicts of interest.” And Segarra believes that she was fired because she refused to back down from this conclusion.

Silva says to Segarra:

“Carmen you have to come off the view that Goldman doesn’t have any kind of conflict of interest policy. We can say they have to improve it. Maybe they have to improve it a lot. … Why can’t we just say they have basic pieces of a policy but they have to dramatically improve it?

To which Segarra responds:

“Between you and me and these four walls… No way, no way this is a policy. I will work with you. I will say they have a very poor policy, ok, but professionally I cannot agree with you.”

15. But the NY Fed disputes her claim. It said that she was fired “based entirely on performance grounds” — aka she didn’t do her job well enough.

The NY Fed statement said:

“The decision to terminate Ms. Segarra’s employment with the New York Fed was based entirely on performance grounds, not because she raised concerns as a member of an examination team about any institution.”

16. Plus the NY Fed insists that it has taken steps to incorporate Beim’s recommendations, and that it “categorically rejects the allegations being made about the integrity of its supervision of financial institutions”. Aka, they have been wrongly accused of being too soft.

If you want to read through the whole detailed account, you can read Jake Bernstein’s ProPublica story here.

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