Bankers committed massive fraud leading to the financial crash of 2008, which then caused cataclysmic job loss, foreclosures and more than a $12 trillion drain on the economy. Where were the law enforcers? Bankers captured them, metaphorically.
More than 10,000 member of Public Citizen petitioned Congress to hold hearings on regulatory capture following the September release of tapes made by a regulator named Carmen Segarra. She resisted following the instructions of apparently captured regulators who were her supervisors, and was fired for it. On Nov. 21, a Senate banking subcommittee will open those hearings. New York Federal Reserve Bank President William Dudley will testify. Segarra worked as an examiner for his agency.
Here are a few questions
Q. According to Carmen Segarra, she was fired for trying to do her job. She was told to tone down her criticism of banks, but declined. How many examiners are terminated each year by the New York Fed? Former counsel to the Financial Crisis Inquiry Commission Bart Dzivi said Dianne Dobbeck, one of the most senior supervisors at the New York Fed, is “completely the wrong type” of person for the job. Is an examiner ever terminated for failing to detect a problem with a bank early enough? Does the New York Fed have a system to reward diligent examiners?
Q. The Segarra tapes cover an 8 month period three years after the crisis. If the crisis itself constituted a “teachable moment,” then must we assume that the problem of regulatory capture is only getting worse?
Q. During the Savings & Loan crisis of the 1980s, regulatory agencies made more than 30,000 referrals to the Justice Department resulting in nearly 1,000 criminal convictions. How many such referrals have the New York Fed made covering the 2008 crisis and after?
Q. Many experts blame the revolving door for “capture.” The bank regulators hire bankers who then return to banks. How many examiners leave the New York Fed to work for the industry they oversaw? While it makes some sense to hire experts with banking experience to examine banks, should there be a limit on how soon they can return to work for a bank? The President’s executive order, building on Public Citizen’s recommendations, restricts industry lobbyists from working for the administration and also returning to the private sector to lobby government.
Q. Sen. Jack Reed, (D-R.I.), introduced a bill Nov. 18 providing that the U.S. President nominates the president of the New York Fed, to be confirmed by the Senate. Currently, the New York Fed board selects the president, and that board is selected, in part, by bankers. Does it make sense for bankers to select the chief of their own supervisors?
Q. In the last few years, regulators have fined companies, but individuals are not held to account. One reform idea is to defer a significant portion of compensation for senior executives in a pool. If the bank must pay a fine, that pool is used. This means all executives have an interest in keeping the bank honest.
Q, Sen. Sheldon Whitehouse (D-R.I.), has proposed the establishment of a special inspector general charged with exposing regulatory capture. Merely the existence of such an office could help prevent capture. Thoughts?
Q. A former JP Morgan whistleblower named Alayne Fleischmann claims the bank knowingly packaged bad mortgages for sale to investors. One account says that JP Morgan increased a settlement offer to $9 billion to prevent her testifying at a trial. Since that account became public Nov. 6, has the New York Fed reached out to interview her? And if not, does a lack of interest in her testimony not further demonstrate that the agency isn’t sufficiently assertive about investigating serious fraud?
Bartlett Naylor is the financial policy advocate for Public Citizen’s Congress Watch division.