Fed Whistleblower Carmen Segarra, Snowden and the Closing of the Journalistic Mind

The financial press has been awash with coverage of This American Life’s broadcast of key section of 46 hours of tapes made in secret by former New York Fed bank examiner Carmen Segarra. The broadcast and related reporting at ProPublica show how utterly craven the central bank was when it came to matters Goldman.

One section covers when the Fed looks as if it might uncharacteristically assert its manhood. Goldman has done a complex derivatives deal with a bank, Santander, which is clearly intended to shore up its regulatory capital levels (even derivatives maven Matt Levine had trouble figuring it out). The transaction has already closed, yet the deal documents state that a condition of completing the deal was that Goldman notify the Fed prior to closing and get a “no objection” (form apparently not specified). Mike Silva, who was the senior member of the Fed team on site at Goldman, was concerned both that the Fed could be falsely depicted as having approved of the transaction if it ever went sour, plus Goldman had set a precedent of pretending the Fed had given tacit approval of a transaction by virtue of never having heard of it.

As an aside, the fact that the concern over this situation wasn’t escalated outside the Goldman team was already a proof of a too-cozy relationship. If Silva was taking this breach as seriously as he professed to have, he should have gone to the New York Fed’s general counsel’s office to get a reading as well as senior backing.

Instead, Silva and the team prep as if they are going to confront their Goldman counterparts….only to have the session start with technical questions, allowing Goldman to dominate the meeting. Silva finally asks about the “no objection” matter, but frames it as an oversight by Goldman, handing them their excuse. Silva emerges satisfied with what happened, as if he had no recollection of the pre-meeting discussions, while Segarra is gobsmacked and disappointed.

Now you might say, isn’t this media firestorm a great thing? It’s roused Elizabeth Warren and Sherrod Brown to demand hearing. The Fed has been toadying up to Wall Street for years. Shouldn’t we be pleased that the problem is finally being taken seriously?

Let’s look at this a tad more clinically. This press reaction is in fact proof that the financial media has been asleep at the switch and underreporting stories by whistleblowers and critics of regulators. The reason that this story is getting traction is the salaciousness of secret tape recordings, which also reduce the burden on reporters to do their job, namely, investigate. Michael Lewis alluded to that issue in his enthusiastic write up in Bloomberg on Friday:

Our financial regulatory system is obviously dysfunctional. But because the subject is so tedious, and the details so complicated, the public doesn’t pay it much attention.

That may very well change today, for today — Friday, Sept. 26 — the radio program “This American Life” will air a jaw-dropping story about Wall Street regulation, and the public will have no trouble at all understanding it.

I don’t buy that excuse, that finance is too HAARD for the pubic to understand, for a nanosecond. Lewis himself has made a side career of making finance, from bond trading (in Liar’s Poker) to CDOs (in The Big Short) to the Iceland meltdown (in Vanity Fair) accessible to laypeople. I have taken issue with some important conclusions he’s reached, but the ideas that a smart, articulate, and diligent journalist can’t present the workings of finance an engaging and reasonably accurate manner is greatly exaggerated. Remember, Lewis isn’t an expert; he admits he quit doing finance when he left Salomon in the 1980s.

That it has taken the release of secret tape recordings for the media to treat an obvious problem like Fed capture by banks as real is an indictment of the state of financial reporting. The fact that all financial regulators, save in some measure the FDIC, are deeply captured should be treated as dog bites man. Willem Buiter spoke forcefully about cognitive regulatory capture considerably before he told Fed officials to their face at Jackson Hole in 2008 (it didn’t go over very well). The OCC has long been even more bank-cronyistic, and the SEC has been systematically hamstrung over the last two decades.

In fact, Carmen Segarra’s story was well told a full year ago, in her whistleblower suit against the Fed and in ProPublica’s coverage of her case, based on interviews with her. And those accounts has further damning details that have been left on the cutting room floor by virtue of not being part of what Segarra captured in her recordings. An extract from our 2013 post Whistleblower Suit Confirms that the New York Fed is in the Goldman Protection Racket:

Segarra was an experienced attorney who had spent her entire career working in banking in the corporate counsel’s office of large financial firms, most recently as a senior counsel at Citi. In other words, she is not a naif or a theoretician. She was hired as part of an effort to increase bank examination functions to meet Dodd Frank requirements. But Segarra wound up on a collision course with the old guard at the New York Fed, which is particularly deeply tied into Goldman. For instance, the current president, William Dudley, had been Goldman’s chief economist) and has a bias to protect rather than regulate financial firms. The senior officer responsible for Goldman at the New York Fed was called a “relationship manager.” No, I am not making that up.

Segarra was tasked to assess whether Goldman’s conflicts of interest policies were adequate in three separate cases: Solyndra, the El Paso/Morgan Kindler acquisition, and a bank acquisition by Santander. What is stunning if you read the complaint, which we’ve embedded below, is how high-handed Goldman was in its responses to Segarra’s inquiries. It’s not hard to imagine that they viewed this as a pro forma exercise that given their cozy relationship with the New York Fed, would go nowhere. They didn’t just stonewall, they told egregious lies. That sort of cover-up usually winds up being worse than the crime, but not if you are in a privileged class like Goldman. When Segarra (and initially, the other members of her team) kept pressing Goldman for answers and making clear that what they were getting was problematic, Goldman then started giving credulity-straining responses.

As the exam moved forward, Segarra came under pressure from the Goldman relationship manager, Michael Silva, who was also senior to her at the bank (this is how you can tell the new regulatory push is all optics: the examiners are subordinate to the established “don’t ruffle the banks” incumbents). Silva, who had been chief of staff to Geithner before becoming “relationship manager” to Goldman, appears, unlike Segarra, not to have had real world financial services experience (he looks to have joined the New York Fed as a law clerk in 1992 and stayed with the bank).

Segarra was fired abruptly after refusing to change her recommendations and destroy supporting documents, which was in violation of regulatory policy (bank examiners are not “fire at will” employees; they need to be put on notice and given the opportunity to correct deficiencies in their performance before they can be dismissed).

I’ve read other wrongful termination suits and Segarra’s looks very strong. It’s going to be awfully hard for the New York Fed to talk its way out of this one.

What is particularly damning for the Fed and Goldman is Goldman’s intransigence during the examination process and the howlers the New York Fed staffers used to justify treating the bank with kid gloves.

Back to the current post. I was dead wrong about Segarra’s suit. It was dismissed last April by Federal judge Ronnie Abrams, who failed to recuse herself even though her husband, Davis Polk partner Greg Andres, was representing Goldman. As Pam Martens wrote:

The unfairness of the proceeding was heightened when just 20 days before the Judge issued her written decision on April 23, she convened a phone conference with both sides to make a shocking announcement: “it had just come to her attention that her husband…was representing Goldman Sachs in an advisory capacity” according to the telephone conference transcript.

Judge Abrams’ husband is Greg Andres, a partner at law firm Davis Polk & Wardwell LLP who previously worked under Lanny Breuer in the Criminal Division of the US Department of Justice. (Breuer announced his resignation one day after the PBS Frontline program reported that “when it came to Wall Street, there were no investigations going on. There were no subpoenas, no document reviews, no wiretaps.”) To date, not one key executive at any Wall Street bank that played a role in the financial collapse has been indicted.

Following that telephone conference, Segarra’s lawyer, Linda Stengle, filed a letter with the court asking for a more complete disclosure of the Judge’s husband’s relationship with Goldman Sachs. The New York Fed responded with its own letter, writing: “Plaintiff’s request for additional disclosures raises concerns about the appearance of a different sort of impropriety: forum shopping…Under these circumstances, the Court should deny Plaintiffs request for additional disclosures and proceed with the case.” (See FRBNY Response to Segarra Request for Filing Amended Complaint.)

Judge Abrams bought this line of reasoning in its entirety and accused Stengle of “judge-shopping” in her written decision tossing out the case — a bizarre allegation since Stengle had not asked the Judge to recuse herself.

Since the April 23 decision came down, Wall Street On Parade has researched this matter and found a great number of roads leading back to the law firm Davis Polk & Wardwell:

Judge Abrams worked at Davis Polk just prior to taking the bench;

Judge Abrams’ husband, Greg Andres, is a partner at Davis Polk;

US Senator Kirsten Gillibrand, who recommended Abrams to Obama for the Judgeship and spoke on her behalf at her confirmation hearing, also previously worked at Davis Polk;

Davis Polk was the second largest contributor to Gillibrand’s 2012 Senate race, according to the Center for Responsive Politics, with its lawyers, employees and/or PACS contributing $333,100;

One of the lawyers representing the New York Fed in the Segarra matter, Thomas Noone, previously worked at Davis Polk and his employment there overlapped with that of Judge Abrams;

Davis Polk previously represented the New York Fed in significant matters;

Davis Polk was a registered lobbyist for Wall Street’s trade association, SIFMA, from at least 2009 through 2013, collecting over $400,000 in lobby fees;

How big a retainer the Judge’s husband has received from Goldman Sachs and when he received it is a side issue. The larger issue is that Goldman Sachs is a huge, long term client at Davis Polk and the Judge’s husband is a partner at the firm. Per the sampling below, deals totaling over $9 billion have been handled by Davis Polk on behalf of Goldman Sachs in just the past two years.

Yves again. Despite the fact that all of this information is available with a minimal amount of reading and Googling, it is almost entirely absent from major media accounts. They’ve largely framed it around the Fed’s “culture,” which includes that the New York Fed kinda-sorta knew this was a problem and hired a consultant to suggest organizational changes.* That means they’ve omitted an element that was much more prominent in Segarra’s filing and the earlier reporting: Goldman’s role as victimizer in this relationship, and almost all accounts fail to mention her whistleblower case and court loss.

But the really damning part as far as the media is concerned is the barrier that is in place for critics. Vitally important stories are either not picked up by major outlets on a timetable when they could have real political impact or not at all. Look at the bar that is now in place for whistleblowers. In the days of Watergate, all it took was a piece of paper handed over in a parking garage. By contrast, a series of NSA whistleblowers pre Snowden were shunted to the netherworlds of reporting. It took Snowden’s mass hoovering of documents and the international manhunt for him for a NSA detractor to get a serious hearing.

Look, for instance, how Bill Black is relegated to the Hallin sphere of deviance. Midway through the Treasury’s two-month-long stress tests, Black stated on Bill Moyers, a show heavily watched by journalists, we had reported on Black’s conclusions even earlier, when the stress tests procedures were announced). He has told me that no journalist called him to include him in “balanced” reporting on that exercise. Another reporting failure: with all the public consternation about the failure to prosecute individual bankers, only now are some fingers being pointed at lame duck Attorney General Eric Holder. Why the lack of agency until now? Why the failure to name and shame when it mattered?

It’s not hard to see that the lap-doggishness of the Fed is mirrored by an undue deference to authority by reporters. A key section from a recent study by Indiana University of Journalism:

One of the most surprising developments over that period over the past ten years, is the steep decline in the percentage of journalists who say that using confidential documents without permission “may be justified.” That number has plummeted from about 78 percent in 2002 to just 58 percent in 2013. In 1992, it was over 80 percent.

That’s even more notable given that the survey took place from August to December of last year, not long after Edward Snowden became a household name for stealing classified documents that revealed the extent of NSA surveillance.

Ironically, the report also showed that only a minority approved of using hidden camera or microphones to get information, the precise approach Segarra used to protect herself, even though in many states, like New York, it is legal to record your own conversations without notifying other parties.

In other words, most journalists are afraid to rock the access journalism boat and do real sleuthing, and to make up for that, they’ll pile onto a story where someone else has taken the risk, in this case Segarra by making her tapes public. And while their release proves Segarra to be as credible as she appeared to be from her court filings, it remains to be seen whether she can really come out a winner. Reputable institutions close their ranks against people who refuse to knuckle under to pressure to conform, and Segarra has made it clear she has way more grit than most. I hope she’s able to use the media tailwinds to reinvent herself.

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* So as not to overegg this pudding, as an aside it is obvious that the Fed was never serious about its engagement with the consultant it hired, an ex-investment banker, now Columbia professor, David Beim. First, for an institution with an ego of the Fed, a report as a stand-alone document, would never be taken seriously unless it came from a firm of the stature of a McKinsey or a Peter Drucker level guru (and mind you, that would be a necessary but far from sufficient condition; the big name consultant could readily decide to pander to the client rather than give hard-hitting advice. Beim does deserve credit for giving what looks to be an unvarnished diagnosis). The only way a consultant could overcome considerable institutional inertia would be if the consultant continued to work with the client in a catalytic role over a period of time. But even in that capacity, he would need clear backing from the very top of the firm, in this case, New York Fed President and ex-Goldmanite William Dudley.

Instead, the assignment was effectively terminated at the diagnosis phase. Although Beim looks to have done a fine job as far as he got, his recommendations on cultural change are at the 50,000 foot level. Even if the executive team embraced them, they’d need at a minimum more detail and likely more reinforcement to keep them from falling back into old habits. Instead, as Beim reports, Dudley took his draft and filed it in his drawer.