Federal Reserve, Americans must listen to Carmen Segarra

To most people, the name Carmen Segarra means nothing. But to a few, her fate validates their worst suspicions about regulators who exist to protect the interests of the regulated.

Segarra is a former bank examiner whose job was to be the Goldman Sachs’ watchdog for the Federal Reserve Bank of New York, which regulates many large New York banks and is the Federal Reserve System’s primary connection to financial and credit markets. She secretly recorded 46 hours of conversations inside the Federal Reserve and Goldman Sachs and released the tapes to Pro-Publica and the radio show, “This American Life.” You can listen to the episode online at ThisAmericanLife.org.

Segarra was fired by the Federal Reserve after seven months, apparently because she refused to budge on her findings that Reserve officials on numerous occasions seemed to treat Goldman Sachs with too much deference. In particular, she insisted based on her fact-finding that the company did not have a policy on conflicts of interest that met regulatory standards.

Her story underscores how regulators have become too cozy with the industry they are charged with policing. Academics call it “regulatory capture.”

This is hardly breaking news. Lax external oversight was among the chief reasons the world’s biggest economy was brought to the brink of depression in 2008. Put bluntly, regulators have to shoulder some of the blame for the financial apocalypse that unleashed the worst economic crisis since the Great Depression of 1929, at a galactic cost to the American taxpayer, and threw millions of Americans out of their jobs and homes. The economy still bears deep scars.

The 2008 financial crisis demonstrated more than ever that the self-regulating financial system was pure myth.

The public has come to catch the joke that on Wall Street, if you represent everyone there is no conflict of interest. Transparency and the financial services industry don’t exactly waltz around arm in arm. In fact, for some bankers transparency is an occupational hazard.

The coverage in the media since the Sept. 26 release of Carmen Segarra’s recordings of Federal Reserve officials not doing their jobs has been minimal. Hers is not a household name like Edward Snowden, who leaked classified information from the National Security Agency that advertised security vulnerabilities and spying on Americans and international leaders.

It may be that the public’s default mode is indifference; they would like to care but there’s just too much going on at the moment. The average American is too busy worrying about making ends meet. And after all, they already knew that banks hold regulators hostage.

Sure, Sens. Elizabeth Warren, D-Mass., and Sherrod Brown, D-Ohio, both members of the Senate Banking Committee, want Congress to investigate Goldman Sachs’ relationship with the Federal Reserve, but it’s more likely that the issue will quietly disappear.

Wall Street makes generous campaign contributions to the guardians of democracy in Washington and spends big on lobbyists to communicate their policy preferences to government apparatchiks. Despite the rosy rhetoric, that makes it highly unlikely that Congress will hold hearings.

Another problem is that many people see government regulatory jobs as stepping stones to lucrative private-sector careers. They develop useful contacts with key employees in the private-sector firms whose behavior they are supposed to regulate and quietly impress these contacts that their “hearts are in the right place.” In this culture of coziness, nothing should be taken at face value.

In the final analysis you can write all the tough regulations you want to regulate the financial system and its participants to prevent future financial debacles. But for those regulations to have any teeth, they must be accompanied by closing the revolving door between lavish private-sector executive suites and the basic steel-desk offices of government agencies.

originally published: October 11, 2014