With the memory of the 2008 bank bailouts and the 2012 Libor scandal still fresh in the collective mind of the markets, it seems concern over collusive oversight practices has not abated. This time, the focus is trained on the relationship between the Federal Reserve banks as regulatory authorities and the powerful U.S. banks they are tasked with monitoring.
A whistle-blower at the New York Fed is accusing the bank of being “captured” by Goldman Sachs–essentially, succumbing to Goldman’s powerful influence and being “soft” on the bank when Fed regulators raised concerns over its activities. The informant, Carmen Segarra, claims she was fired from her job at the NY Fed because she insisted upon being hard on Goldman Sachs for questionable deals or practices that raised red flags. Now, Ms. Segarra has released secret tape recordings that seem to indicate favoritism by the NY Fed toward Goldman Sachs even though its dealings had been deemed “legal, but shady.”
In response, William Dudley, President of the New York Fed, defended his agency and dismissed the notion that they were unduly influenced by Goldman Sachs. Because of its location in New York and its prominent status within the Federal Reserve Banking System, the NY Fed has always been inextricably tied to Wall Street. (President Dudley was himself the chief economist for Goldman Sachs for over twenty years.) Mr. Dudley went on record last year denouncing the price rigging and collusion that takes place at large financial institutions. Meanwhile, his agency took little notice that Goldman has run up against allegations by the SEC of conflicts of interest, dubiously selling financial products to their clients while simultaneously placing speculative bets against these products.
This story again raises the issue of the Fed being overly sympathetic to the financial institutions it is tasked with overseeing. Massachusetts Senator Elizabeth Warren has called for a Senate Banking Committee hearing, pointing out that the Fed “can identify problems, but can’t bring itself to make the banks fix those problems.” As the scandal continues to unfold, we wait to see how much teeth a response from the regulatory community will have. Will financial juggernauts like Goldman Sachs be allowed to continue to game the system, or will they finally receive some deserved scrutiny?