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.
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:
“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.”
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.
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.