Current Events

What Oversight?

10.11.13 | Comment?

Back around the time of the financial crisis I read a number of articles from the Wall Street Journal about the incestuous relationship between the New York Fed and the banks they were supposed to be regulating. It was described as something like this: new regulators could expect to work a few years for the Fed before being recruited to work for these same banks–that is, as long as they didn’t make waves with their findings. From the banks’ perspective it makes sense to hire employees with Fed experience so they don’t run afoul of some law, but the Fed culture was that advancement happened by hiring in the same private sector they were supposedly monitoring, not up the ranks of the Fed itself. Then after several years and a few promotions, those same former regulators might be hired back with the Fed as directors due to their extensive experience of the banking industry. In other words it’s a big, dysfunctional revolving door.

Goldman is known for having close ties with the New York Fed, its primary regulator. The current president of the New York Fed, William Dudley, is a former Goldman partner. One of his New York Fed predecessors, E. Gerald Corrigan, is currently a top executive at Goldman. At the time of Segarra’s firing, Stephen Friedman, a former chairman of the New York Fed, was head of the risk committee for Goldman’s board of directors.

So now we have a story of a “new guard” regulator hired after the crisis who refused to play the game and ran afoul of the “old guard”. It’s a fascinating story, but also a warning about putting too much faith in the Fed’s policing ability even post-crisis.

“I was just documenting what Goldman was doing,” she said. “If I was not able to push through something that obvious, the Federal Reserve Bank of New York certainly won’t be capable of supervising banks when even more serious issues arise.”

via NY Fed Fired Examiner Who Took on Goldman.

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