There’s a startling moment in the recently released audio recordings of Goldman Sachs bankers talking to their regulators at the Federal Reserve Bank of New York. But it’s not shocking for the reasons you might assume.
The tapes — secretly recorded by then-bank examiner Carmen Segarra, whom the New York Fed employed for seven months in late 2011 and early 2012 to keep tabs on Goldman — don’t capture any craven wrongdoing by the bank. (Goldman Sachs responded with a short, dismissive statement last week when the tapes were made public.) Instead, it’s the New York Fed that comes off looking terrible — deferential and ineffectual, and apparently concerned above all with accommodating the banks it was supposed to regulate. It’s a perfect picture of a culture structured by regulatory capture.
For instance: ProPublica reporter Jake Bernstein describes a meeting where a senior Goldman compliance executive “mentioned that Goldman’s view was that once clients were wealthy enough, certain consumer laws didn’t apply to them.”
That sounds cavalier, and Segarra was “shocked” to hear it. She wanted to ask the executive what he had meant. Her colleagues at the New York Fed, however, told Segarra she didn’t hear what she heard — and even if she had, the executive didn’t really mean it. Asking for a follow-up explanation was never raised as a possibility.
This immediate instinct to shut down any questions about Goldman’s behavior is not the reaction you want from a regulator. And it’s made all the worse because Segarra’s question in this case was actually quite benign. There’s a very easy explanation for that executive’s comment: It’s true.
Wealthy individuals can qualify with the Securities and Exchange Commission as accredited investors. This means they can invest in more things and have fewer protections afforded to them. That’s a slightly more precise version of what the Goldman executive said, but people practicing in an expert and jargon-filled field often talk in shorthand. Both the New York Fed and Goldman are familiar with accredited investor rules (or they certainly should be, at any rate). So if there was the possibility of an innocent explanation like this, why were Segarra’s colleagues so loath to ask questions about what that executive said?
If the Fed is too afraid to ask Goldman Sachs questions when the bank could well be in the right, how can it be expected to ask questions when the answer might point to even a hint of wrongdoing? That would be awkward. And the avoidance of awkwardness — no matter the consequence for regulation — seems to be a very high priority for the New York Fed.
(For much more about Goldman Sachs, the New York Fed and Segarra’s secret tapes, check out the excellent story by ProPublica and “This American Life.”)
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