Does Carmen Segarra explain Too Big to Jail?
Follow [twitter-user link=”yes”] on Twitter
Nobody openly supports unequal justice.
When Attorney General Eric Holder confided to Congress that some banks were too “large” to prosecute because it might cause systemic tremors, he was appropriately pilloried for declaring a “too big to jail” policy.
A recent disquieting episode sheds light on some of the interactions between government regulators and the banks they oversee. This episode refines our understanding of regulatory capture (at least at one bank). The “Carmen Segarra” incident shows us more about how the regulators think, how they approach errant bankers, and how far the regulators may be from adopting the obvious solution of breaking up these too-big-to-jail banks.
Spoiler alert: they are far.
Carmen Segarra spent seven months beginning in October 2011 as a senior bank examiner at the New York Federal Reserve Bank. The New York Fed is one of the front-line supervisors of the big Wall Street banks. It counts among of the regulators that the Justice Department might consult before prosecutors decide whether to seek full penalties, or to pull a punch if advised that a criminal conviction of a bank could endanger the economy,
Segarra took this job after positions at Citigroup, Societe General and MBNA, and after schooling herself at Harvard, Columbia and Cornell. The NY Fed assigned her to help oversee Goldman Sachs. While there, she uncovered serious problems. In a chain of events, when she brought these problems to her supervisors, they fired her.
In 2013, Segarra sued the New York Fed and several of her supervisors. She outlined episodes where her bosses blocked her efforts to ask tough questions or promote better policies at Goldman Sachs. For example, Goldman worked for El Paso Corp as an advisor as it bid for Kinder Morgan, Inc. Advisors help buyers secure the lowest price and best conditions. But Goldman also owned some $3 billion worth of Kinder, and a Goldman banker held a sizeable personal stake in Kinder. Sellers want the highest price when they sell. Segarra questioned Goldman’s conflict-of-interest policy. But her bosses demanded that she tone down her memorandum on the issue.
Her allegations from 2013 received some public attention at the time. Regulatory capture — where crooks control the cops — is a festering problem in bank supervision.
This September, Segarra went a step further when she released audio tapesThe very Goldman and New York Fed staff described in her lawsuit can be heard saying what she alleges. The “tone it down” conversation with her boss allows the listener to verify her charge. You are there. As Michael Lewis observed, these tapes could become the “Ray Rice moment” for bank regulators. (Rice is a Baltimore Raven football player guilty of domestic violence. That episode had been known for months, but when the tape was released, the NFL increased its sanctions on the player.)
The Segarra audio tapes emphasize the servility of regulators. In one exchange, Segarra’s boss’ boss — Michael Silva — raises a glaring problem with a Goldman executive with the indirection and timidity of a mail room clerk searching for a delicate way to tell the CEO he’d spilled coffee on his shirt. (Silva now works for GE Capital, another example of the revolving door problem behind regulatory capture.) Pulitzer winner Jake Bernstein of ProPublica shepherded Segarra’s tapes, of which there are 46 hours, into the public domain. As he summarizes, the tapes demonstrate the extraordinary deference of the regulators to the banks. (Of note, it is legal under New York and federal law to make tapes.)
It may be unrealistic to expect Hollywood histrionics from our bank regulators, but the Segarra tapes reveal that some senior bank regulators can’t even utter a clear criticism to a banker.
If Segarra was told to tone down her criticisms, if her bosses won’t confront bankers, if these same regulators leave government to work for mega-banks, we might realistically expect them to tell prosecutors in a timid way that a serious criminal charge is unwise for the financial system.
How can regulatory capture be addressed? Legislating spine may difficult.
One step would be greater transparency. Presumably, officials at the New York Fed are thinking more seriously about their capture problem following Segarra’s lawsuit and the release of the audio tapes. If these regulators knew in advance that discussions would be made public, particularly in the case where they consult with the Justice Department about a pending prosecution, they might be less beholden to the mega-banks. Transparency might serve as a prophylactic against capture. Public Citizen believes that criminal cases with too-big-to-jail banks deserve this kind of transparency.
Congress should hold hearings on the Segarra case. Helpfully, several leading members have called for hearings, including Sens. Elizabeth Warren (D-Mass), Sherrod Brown (D-Ohio), and Reps. Maxine Waters (D-Calif.), Keith Ellison (D-Minn), Al Green (D-Texas). If and when they do, Public Citizen believes that solutions including transparency should be accorded a full discussion.
Bartlett Naylor is the financial policy advocate for Public Citizen’s Congress Watch division.
Join Sen. Elizabeth Warren (D-Mass.) and other lawmakers in calling for hearings to hold the New York Fed accountable for its disgraceful deference to Goldman Sachs and its firing of Carmen Segarra.