September 29, 2014
You Should Listen To The Goldman New York Fed Story
Posted by David Zaring

This American Life has a banking supervision story (!) that turns on secret recordings made by a former employee of the New York Fed, Carmen Segarra, and it's pretty good, because it shows how regulators basically do a lot of their regulating of banks through meetings, with no action items after.  That's weird, and it's instructive to see how intertwined banking and supervision are.  There's a killer meeting after a meeting with Goldman Sachs where Fed employees talk about what happened, and - though we don't know what was left on the cutting room floor - the modesty of the regulatory options being considered is fascinating.  Nothing about fines, stopping certain sorts of deals, stern letters, or anything else.  The talk is self-congratulation (for having that meeting with Goldman) and "let's not get too judgmental, here, guys."

The takeaway of the story, which is blessedly not an example of the "me mad, banksters bad!" genre, is that this kind of regulation isn't very effective.  It clearly hasn't prevented banks from being insanely profitable until recently, in a way that you'd think would get competed away in open markets.

But here's the case for banking regulation:

  • Imagine what it would be like if Alcoa and GE had EPA officials on site, occasionally telling them to shut down a product line.  That's what bank regulators do, and, more broadly, did with things like the Volcker Rule (with congressional help).
  • Since the financial crisis (and that's the time that's relevant here), regulation has made banking less profitable, not more, share prices are down, so are headcounts, etc.
  • Regardless of how it looks, regulators that essentially never lose on a regulatory decision - that includes bank supervisors, but also broad swaths of agencies like Justice and DoD - don't experience themselves as cowed by industry.  Kind of the opposite, actually.  So what you really worry about is the familiarity leading to complacency, not fear.  Regulators can fine any bank any number they like.  If they want someone fired, they could demand it without repercussion.  

The fact that TAL pulled off this story, given that it was centered around an employee who lasted at the Fed for 7 months before being fired, who made secret recordings of her meetings with colleagues (who does that?), who mysteriously and obviously wrongly alleged during her time at the Fed that Goldman Sachs did not have a conflict of interest policy, whose subsequent litigation has gone nowhere, and whose settlement demand was for $7 million (so that's one million per month of working as a bank examiner, I guess), is impressive.  But that's the former government defense lawyer in me, your mileage may vary.

Morover, even skeptical I was persuaded that maybe the Fed could do with a more ambitious no-holds-barred discussion among its regulators, at the very least.

Administrative Law, Finance, Financial Crisis, Financial Institutions | Bookmark

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