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The Secret Goldman Tapes

It’s the kind of bombshell that, once it goes off, surprises no one at all. The American public is used to reports of bad behavior from banks and a complete lack of apparent regulation to stop abusive behavior. It was all supposed to change, yes, but no one believed it did.

Now, there are tapes. On “The American Life” the segment on the tapes of Carmen Segarra, former New York Fed lawyer assigned to Goldman Sachs, are the kind of explosion that may be something new. For one thing, they are raw and go deep into the heart of why the Federal Reserve isn’t regulating banks the way it should be. For another, they are the centerpiece of an investigation by the Senate Banking Committee headed by Sen. Warren (D-MA).

This could go somewhere. And it should.

Goldman Sachs' tower at 30 Hudson St.  Nice digs.

Goldman Sachs’ tower at 30 Hudson St. Nice digs.

At the heart of the story is the attempt by Goldman to pick up $21B worth bad looking debt owned by Banco Santander of Spain, who apparently needed to unload it very quickly on a Friday night just before the Epiphany holiday in January 2012. Goldman would make $40M on the deal, so they were eager, but the whole thing looked really fishy.

What no one other than Segarra knew at the time was that she had her fill of shady looking deals since she was hired to watch Goldman in 2011 and was secretly taping the whole thing.

Everyone who cares about the financial system for any reason needs to listen to this story or read the transcript, so this posting today will be a bit thin. Just go listen to it – it’s brilliant and gets to the heart of the problems in very stark terms. Here are a few quotes with almost no context to get you excited:

Well, the laws do apply to you.  Plus a little more.

Well, the laws do apply to you. Plus a little more.

A senior executive from Goldman was talking about all sorts of things, and mentioned that Goldman’s view was, that once clients were wealthy enough, certain consumer laws didn’t apply to them.” (He was apparently joking, but they never said it was just a joke – only that you shouldn’t take things too literally).

Credibility at the Fed is about subtleties and about perceptions, as opposed to reality.

The Fed was trying to change, and moving the Fed, he said, in an unfortunate metaphor, was slow like moving the Titanic.

It’s pretty apparent when you think this thing through that it’s basically window dressing that’s designed to help Banco Santander artificially enhance its capital.

And, finally, my particular favorite – which requires some explanation:

The organization does not encourage thinking outside the box. After you get shot down a couple of times, you tend not to go there anymore.

Mind the Box.

Mind the Box.

Of all the horrible examples presented of the NY Fed openly being too chummy with Goldman and approving a deal that they knew was just “window dressing”, why is this the most damning of all?

Because, as we’ve said in Barataria many times, “Banking should be boring.” But we all know that it isn’t. Investment banks like Goldman thrive on innovation – on aggressive young men who push the envelope constantly and come up with new ways to make money that, in the end, no one understands. That’s why banking should be boring.

Regulating a culture of constant innovation requires, at the least, regulators that are as free flowing as the bankers. If that sounds impossible or almost certainly unfair, you’re right. A well regulated banking system has to be cautious about innovation in order to be well regulated, which is to say to be guaranteed to be safe.

Sen Elizabeth Warren (D-MA)

Sen Elizabeth Warren (D-MA)

But when banking isn’t boring and the new and exciting deals are being cooked up all the time, the worst possible thing is to have a culture that stifles “thinking outside the box”. If that’s what’s going on at the Fed, they have no change at all, absolutely zero, of ever staying even close to where Goldman is as they zoom ahead with new “innovations”.

Listen to the whole thing or read it for yourself. Goldman is far too close to the Fed for anything like pertinent regulation to take place, but more to the point the management in place right now makes it impossible to even begin to reform it. The entire system has to be shaken from the top down before anything can possibly change.

This is your mission, Sen Warren, should you decide to accept it. Oh, she accepts it. But can this impossible mission be done? We’ll see.

12 thoughts on “The Secret Goldman Tapes

  1. I don’t know that the transaction in question is that bad. Goldman must buy a lot of things from other banks all the time that don’t look good but if the deal is right for them why shouldn’t they? I agree that the overall climate is the problem in this report & its no surprise at all. Of course they are far too close to the banks they regulate, that’s why they get away with so much! Good point about innovation, I have no idea how a regulator would ever keep up with the products offered by the big banks.

    • I can’t comment on why the Santander transaction in particular is being focused on. It does not appear to be the worst thing I’ve seen on the surface. It does appear that Goldman, in general, has cleaned up its act since 2008 as noted before.
      However, the story of the Fed being too close to the banks remains. It’s ugly. And I really think that if they can’t think “out of the box” they will be incredibly far behind and remain there.

  2. The call for vigorous reforms in banking and financial regulation is well placed.

    I want to take take note of the protesters in Hong Kong. I feel like I am in unison with their sentiments. Thailand too.

    I want to applaud President Obama for his speech at the United Nations. In my heart I wish there to be a D-Day like invasion of Syria and Iraq to restore hope to those nations. Both Assad and IS must be neutralized. Iraq put back together. So many suffer and they need the permanent assistance of United States and it partners. Germany and Japan reformed themselves and it can also be done in the middle east and in the Islamic world. Sometimes history comes washing up on the shores of America…

    I want to salute Prime Narendra Modi of India. India has 1.2 billion people and he was well received by Indians attending at Madison Square Garden.

    The great recession and its underlying causes need continued vigorous, but this year has been a game changer in international relations.

    • Everything is in flux right now – I haven’t been sure what to write about. Modi definitely was well received, and I’m thinking about what to say about him. The thing is that it’s hard to get excited about a nation that has proven almost impossible to govern.
      As for the rest of the world, I do think that large hunks of nations are not screwing around anymore. That means the Arab states mostly, as ISIL seems to have really spooked them – I doubt they will play games with militant extremists like they have in the past. I’m thinking about writing on this for Friday.
      As for Europe, Russia has them scared poopless right now. They have their own mess to worry about, too. It’s not good for them.

      • The worldwide descendants and relatives of the Occupy Wall Street and Democracia Real Ya movements has few recent parallels. Some would note the worldwide uproar in the 1960s, but that wasn’t quite the same. In social terms, this is more like the worldwide workers movement of the late 19th century. It is going to overthrow every government in the world: some will go peacefully at the ballot box, others will resist with gunfire.

        In the 19th century, the old world order largely lasted until 1914, and then was utterly destroyed in World War One, never to return. Hopefully the old powers will not resist as hard this time.

      • I am not impressed with the movements we have generated so far – they are leaderless and rather passive. They have no strong agenda that can be pushed. When we have those things we can hold our politicians to them and then see how far we have to go for real change. Right now I’m afraid it’s far too mushy, and Samuel Gompers, et al, would certainly agree.

    • A small number are, such as the Fabulous Fab. But this incident is not as much about Goldman as it is how the Fed regulates them. I think a better question is, “Why aren’t people getting fired?”

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