Whistleblower Suit Confirms that the New York Fed is in the Goldman Protection Racket

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On Thursday, a former bank examiner at the Federal Reserve Bank of New York, Carmen Segarra, filed a suit (embedded at the end of this post) against the New York Fed and several of its employees alleging, among other things, improper termination. The complaint is a doozy and some of the additional details supplied by Segarra to ProPublica make an already ugly picture look even worse.

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 Sandanter. 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. The complaint is short and readable, but for your convenience, I’ll extract some of the really juicy bits.

The bone of contention is that bank regulations required Goldman to have a firm-wide conflicts of interest program. The reason that it needs to be firm wide is that letting business units have influence or worse, control over compliance issues is putting the foxes in charge of the henhouse. JP Morgan had risk control for its CIO unit located in the CIO, not the bank, level. It should be no surprise that a fiasco like the London Whale was the result.

Goldman blew off Segarra’s first document request. When asked about it (before Goldman realized someone at the Fed was actually taking the matter seriously), the bank said on separate occasions that it had no firm wide conflicts of interest program.

And when Goldman finally started producing documents, things got uglier:

Screen shot 2013-10-11 at 3.26.25 AM

The ProPublica account adds more details based on its interviews:

The discussion turned to the name of the group that oversaw conflicts at Goldman: “Business Selection and Conflicts Resolution Group.” Segarra’s supervisor, Johnathon Kim, asked if business selection and conflicts were, in fact, two different groups. He was told they were not, the minutes show.

Goldman officials stated that the bank did not have a company-wide conflict-of-interest program, Segarra’s minutes show. Moreover, the head of the business selection and conflicts group, Gwen Libstag, who is not a lawyer, said in a subsequent meeting on Dec. 8 that she did not consider what her staff did a “legal and compliance function,” according to Segarra’s minutes.

“That’s why it’s called business selection,” another Goldman executive added. “They do both.”

Given the Fed’s requirements, the regulators were stunned, Segarra recounted in an interview. “Our eyes were open like saucers,” she said. “Business selection is about how you get the deal done. Conflicts of interest acknowledge that there are deals you cannot do.”

So when Goldman is caught with its pants down, what does the New York Fed top brass do? Silva starts making over-the-top claims that the sky will fall in on Goldman (and therefore the financial system!) if this information isn’t suppressed:

Screen shot 2013-10-11 at 3.33.15 AM

This is just an insult to the intelligence of anyone who has been awake during the crisis. Goldman was raked over the coals in the media in 2010, first when the SEC filed its suit in April on one of its Abacus CDOs, and later when Carl Levin turned the spotlight on other particularly noxious Goldman CDOs, such as Timberwolf and Hudson. Yet even though Goldman’s reputation suffered and its stock price took a hit, it did not suffer if any loss of customer business. A lot of that is ego: most clients think they are smart enough to protect themselves from the likes of Goldman. Others say that even with its double-dealing, it still offers services other don’t. For example, if you are a hedgie and for some reason really want to do a trade in August in the late afternoon on a Friday, you’ll have trouble scaring up anyone you’d trust to take your order at most shops. By contrast, Goldman makes sure to have all the desks covered.

Oh, and after this meeting, Segarra started getting requests from staff affiliated with Silva to alter, and later, destroy meeting notes and other records.

Given that Goldman staff had no compunctions about lying, it should come as no surprise that the bank withheld other important information. Segarra and her colleagues were stunned when Judge Leo Strine issued a blistering ruling on shareholder litigation for the El Paso/Kindler Morgan merger. Among other things, he criticized Goldman for not informing El Paso that its lead Goldman banker who was supposedly on its side had an undisclosed $340,000 personal stake Kindler Morgan, meaning he had a strong personal incentive to get El Paso to accept a lower price. Not only was this news to Segarra, when it shouldn’t have been. She developed a long list of questions with the New York banking regulator to ask Goldman at a meeting scheduled between Goldman and various regulators, including the SEC. Silva then barred Segarra from asking any questions about El Paso/Kindler Morgan but the SEC went over some of the issues that concerned her. She inferred how Goldman thought it could justify this misconduct:

Screen shot 2013-10-11 at 4.06.31 AM

Segarra also ascertained that Goldman had misrepresented that the New York Fed had approved the Sandanter deal (it needed to be reviewed for anti-money laundering compliance). Again, the New York Fed staff tried waving her off, telling her Goldman made this sort of misrepresentation “all the time” (meaning the Fed is complicit) and that it was moot because the deal had closed (so is robbing a bank also moot when the hit man successfully makes off with the dough?). Segarra was told not to discuss the matter internally, even with the Fed’s legal staff. And the reason? As Johnathon Kim, her immediate boss, said, “Because I told you so. For your protection.”

Mind you, this is only a partial description of the extent of the stonewalling and internal sabotage that Segarrra faced. If you read the account at the New York Times’s Dealbook, you get only a watered-down version of the allegations and a whisper campaign from the New York Fed, with unnamed sources accusing Sagarra of being subject to “conspiracy theories”. Admittedly, any smart litigant will save its response for the courtroom, but the sad part is that the New York Fed may be so deeply captured by the banks that anyone who is serious about looking into possible misconduct must be crazy. After all, banks like Goldman have good intentions and anything that looks like misconduct is just an honest misunderstanding.

But there’s one mention in the complaint (numbered para 74) which is the linchpin as to why the examination regime is so diseased. Goldman (which does not hesitate to make threats) threatened it would “waive privilege” if Segarra kept being so inquisitive. I don’t think this is exactly what Silva meant to convey, since my reading is that only the bank examiner or regulator can waive privilege. So what I read this threat as saying that if the Fed persisted, Goldman would not longer operate as if future communications on the El Paso/Kindler Morgan matter were privileged, ie, it would act as if the New York Fed were a hostile outside party who would need to compel document production and further responses to questions via subpoena.

Now if we lived in a world where regulators had any guts or power, the New York Fed would have some ready counterthreats. For instance, in Japan, firms (it was always the foreigners, the Japanese banks knew better) that tried defying the Ministry of Finance would be subject to an ongoing MOF audit until they complied. A MOF audit was so painful (MOF staff would descend on the banks’s offices and seal files, among other things), that they would capitulate quickly. Untimately, the Fed controls access to the large payments system on which all large financial firms depend. If a bank wanted to play hardball and defy examination efforts, which is what Goldman was doing, the Fed could have a scale of escalating charges for certain types of unresolved compliance issues. No one would need to know unless the charges hit some level of public reporting materiality, which for a bank as large as Goldman would be pretty large. But if nothing else, it would allow the Fed to hire either more internal or outside counsel for any real staredowns.

But since we don’t do tough-minded regulation in the US in the US, even trying to implement a sensible regime like that would elicit all sorts of howls and legal arguments. The sad reality is once weak regulation becomes normal, it’s very hard to turn the clock back. Since the near destruction of the global economy wasn’t enough to produce a sea change, it’s hard to imagine what could.


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  1. H. Alexander Ivey

    Good question (about a sea change). The Japanese literally had one a couple of years ago with their nuclear power industry, and they, to this day, have not changed a thing.

    Go figure.

  2. Paul Walker

    Nothing but your regular.

    I’m waiting for the US Attorney for the Southern District of New York to respond on behalf of Goldman by bring criminal charges against Carmen Segarra for acts of domestic terrorism for threatening essential elements of the global economy thereby rendering aid and assistance the enemies of the state during wartime.

    1. Pete C

      Thanks for the laugh. This was a stunning read. By the time I got to the phrase “covenants of Good Faith and Fair Dealing,” I had forgotten to breathe.

  3. Expat

    Just taking a moment to reflect on the heroism of our whistleblowers. In an era in which the rewards of self-serving careerism vastly outpace the satisfaction of working for the public good, the courageous people who stand up to power truly speak for all of us — oops, I mean the 99% of us. We owe them a huge debt, the kind of debt that can’t be paid in money but only in respect and gratitude.

    1. voltaic

      That is why they are so feared. The current system rewards lies and punishes the truth, both in politics and business.

    2. peace

      Also please act: personally give them your respect and gratitude … and offer to help.

      Take action and email whistleblowers to let them know that you appreciate their efforts. Whistleblowers often lose their jobs and many of their friends. Even one email of support means a lot. Also, you could offer to help them: “What can I do to help?” or “I’ll help you if you point me towards some online research that you need help with.” or “I’ll write to legislators, regulators, prosecutors.”

      1. peace

        Thank you for mentioning the fundamental role of self-interested careerism.

        Many folks are honest and dislike corruption but legitimately fear losing their jobs. Some have “guts” but it is difficult to fight the organizational PR and social opprobrium that labels whistleblowers as disloyal, paranoid, and ironically as self-interestedly pious or moralistic. Being a loser pariah sucks.

  4. Richard Lyon

    Anybody who was so naive as to believe that Dodd Frank was ever intended to be anything more than window dressing really wasn’t paying attention. It is now five years after the great financial crisis. The financial industry has survived with its power completely intact. They have a green light to continue running the casino with full assurance that they will get bailed again with no serious strings attached.

  5. s spade

    I’m shocked, shocked, that the Fed is in bed with Goldman, which has only been a bank since 2008. Here I thought all this time that the Fed was independent.

    Kabuki regulation, Kabuki Congress food fights, a President doing exactly the opposite of what he promised over and over (and over and over) during his campaign. What next? Maybe a war against an imaginary enemy? Oh, wait, we’ve had that for twelve years.

    1. Jim Haygood

      ‘Goldman, which has only been masquerading as a bank since 2008.’

      There, fixed it for you. Why is the Federal Reserve backstopping, and extending a zero-percent line of credit to, the investment bankers Goldman Sachs and Morgan Stanley?

      Investment banking is a risky business. If the market chose to stop lending to these firms in 2008, they should have been allowed to die. Saving white-shoe investment bankers is not the public’s responsibility.

      Yank these corporate welfare queens off the sugar tit, and then abolish the freaking Fed that conspired to give them a permanent ‘free money’ credit line.

  6. Anonymous

    It’s not just the NT Fed who covers up Wall Street crimes, recall the policy of the SEC to shred incriminating documents to cover the tracks of the very criminals who the SEC was suppose to be protecting the public from.

  7. Bam_Man

    Hardly surprising, but sickening nonetheless.
    Kudos to Ms. Segarra for filing the suit, surely knowing that she will be hounded by these criminals for the rest of her life.

  8. Aussie F

    Somebodies looking at some serious jail time at the end of this debacle. Unfortunately it will probably be Carmen Segarra.

    1. steelhead23

      My thoughts exactly. The way to cure systemic corruption is through large-scale incarceration. If our democracy is to be saved, we citizens and our courts will have to resuscitate it.

      One day, men like Bradley (Chelsea) Manning and Eric Snowden and women like Carmen Segarra will be seen as heroes, not criminals while the likes of Dimon and Blankfein stand in the docks.

  9. craazyboy

    I guess if Goldman can get Congress off their butts and promptly pass the TPP, then perhaps Goldman can counter sue Segarra for loss off profit from this fiasco which may drive any of their scheming customers away.

    Then I see a big examiner “professional liability insurance” market opening up. Good for biz. Good for the economy. More GDP growth fodder.

  10. jo6pac

    This will become a matter of national security and eric the holder will make it disappear for his puppet masters.

  11. monday1929

    “Relationship Manager”- another word for Pimp? Ordering a bank examiner to destroy evidence/work product might get Michael Silva, Michael Koh and Jonathan Kim a few months in jail, then well paid jobs on Wall Street. Carmen will never get another job in finance.

    Why wouldn’t Goldman just write up a firmwide compliance rule,illegally back-date it and then just ignore it? Because their arrogance is becoming fatally powerful.

    Oh, and Fuck the NSA. You are a Cancer on the Cancer that is America. Please add me to your Kill list, it will be an honor.

  12. psychohistorian

    A very fine bit of reporting of social cancer in the financial arena.

    Kudos to Carmen Segarra for having the fortitude to stand up to the financial cancer she saw in operation.

    A pox on my fellow humans that don’t demand an end to control of society by the financial elite….the source of the social cancer.

  13. DolleyMadison

    Spencer Bachuus, incoming chairman of the House Financial Services Committee, who is poised to “oversee” the implementation of Dodd-Frank, said in an interview with The Birmingham News:
    “In Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks.”



  14. Hugh

    The Fed is a private banking cartel which is there for the banks, not the law or anyone else. This reminds me of the Aguirre case at the SEC back in the Bush Administration. Aguirre was more junior than Segarra but wanted to depose John Mack of Morgan Stanley about his personal connections to a dodgy hedge fund. A high powered Wall Street attorney paid calls to Aguirre’s bosses. Her name was Mary Jo White as I recall. The upshot was that Aguirre was fired and the investigation into the hedge fund and John Mack died. White is, of course, now the head of the SEC.

    Goldman looks on Treasury and the New York Fed as unnamed subsidiaries. It has after all heavily infiltrated both. Geithner was pretty much a Goldman bootlicker. So it should come as no surprise that a Geithner bootlicker like Silva should continue the tradition, especially with Dudley in charge.

    “Reputable financial firm” has become an oxymoron. Still the Segarra case just confirms yet again that even crooked financial firms would have to be crazy to do business with Goldman.

    What this shines the light on though is that while Goldman players like to sell the line that they are the smartest guys in the room and the rest of the planet is just full of muppets, this really isn’t true. People forget that Goldman had to be saved not once but twice in the week in which Lehman blew up, first as part of the AIG deal and then at the end of the week by its joke conversion into a bank holding company. Goldman smarts are just astute PR. They aren’t all that bright, but they are really, really well connected. And yes, Virginia, there is a difference between the two.

    1. down2long

      Thanks Hugh, Very savvy thinking. I’d thought about Goldman being bailed out twice. I was aware of the AIG and bank conversion – just never operated the matrix.

      It was with some schadenfreude that I saw that Slimin’ took a small loss today. It is remarkable that with the Fed’s spigot gushing with such velocity (and Chase rakin’ it in as a a Fed owner bank) that they couldn’t steal enough money to be in the black. Wonders never cease.

    2. craazyboy

      Make that 3 times. After getting the $12B under the table from either TARP or the Fed (foggy memory, but is was money, not a loan. They were paying off an AIG counter-party – which makes it all ok), Warren Buffett came along after and gave then $5B in return for some high dividend paying preferred stock.

  15. Crosley Bendix

    Yves: Is it your opinion that the Japanese financial system is less corrupt than the American system?

  16. NoNamesPlease

    I am of two minds.

    1. There is no honest or legal way to make money on investments. The only way to win is to break the law manipulate the market and steal the money. Which is fine because obviously once you have the money, no one asks where you got it.

    2. Since Goldman has raised investment crime and market manipulation to the Nth degree, if I invest it will definitely be with Goldman. They’re the ones manipulating the market and the only ones who know how to make money coming and going. I don’t mind if they keep some as long as I get mine.

  17. Engineer

    The federal reserve is a privately owned bank, always has been. Everyone should read The Creature from Jekyll Island to understand what it is, and how it was created, and what role it plays.

    The Fed is owned by the Morgans and the Goldmans. This isn’t conspiracy theory or anti-semitism, this is just the names of the people who *founded* it.

    The idea that it is a “regulator” is asinine to anyone who knows history.

    The real question is, why do liberals support such a situation and then act shocked when it acts according to its own best interests?

    Giving a private bank a monopoly on the creation of currency in exchange for the ability to print unlimited currency is a criminal scam perpetrated by the government. Liberals love it because they love spending money. Many countries have done this because it means they can go to war whenever they want.

    So, either support the movement to End the Fed, or realize your hypocrisy when you pretend like it is a regulator.

  18. EoH

    Goldman lacks a company-wide conflict-of-interest evaluation function? Quelle suprise. Given the ubiquity of potential conflicts at such a powerhouse firm, that means Goldman buries the conflicts whenever it is profitable to do so. Let’s hope this wrongful termination suit gets well into discovery before being settled and hidden away under (probably Goldman, not Fed, devised) non-disclosure commitments.

  19. EoH

    Your comparison with Japanese MOF treatment of recalcitrant foreign investors is entirely apt. Their actions are normally entirely procedural, but they can stop your business dead in the water and, intentionally and potentially, all your other Japanese-related interests, if your path along the learning curve doesn’t immediately accelerate. But then Japanese regulators have plans (quick, smelling salts), and work toward goals not limited to the immediate profitability of their charges. I once encountered a Japanese agency with this motto on its seal and letterhead: “Deus ex machina.” The import was lost on my colleagues.

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