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Goldman Sachs: Too Big to Upset With Regulatory Oversight?

October 6, 2014


By Joe Rothstein
Editor, EINNews.com

You may already have met Carmen Segarra. If you have, you read about her on the investigative journalism site Pro Publica, or heard her story on the PBS program This American Life.

In case you missed either, Segarra is the former bank examiner for the Federal Reserve Bank who was fired after only 7 months on the job and who took with her 46 hours of recordings she secretly made during meetings with supervisors and fellow staff members.

The story she and her tapes tell is that the bank she was hired to help oversee, Goldman Sachs, not only was too big to jail or fail, it was even too big to upset with tough questions about suspicious behavior.

The immediate issue that got Segarra canned was her insistence that Goldman Sachs didn’t have a company policy regulating conflict of interest. The Federal Reserve requires such a policy and she was under the impression that it needed to be enforced.

What gave her that impression? For one thing, it’s the law. For another, at the time Goldman Sachs was involved in an egregious federal court case over conflict of interest. Goldman was hired to help El Paso Gas sell the company at the best price it could get. At the same time Goldman owned a $4 billion stake in the buying company and had every interest in keeping the sale price low. Not only that, the lead Goldman executive working for El Paso had a personal investment in the buyer.

Goldman seems to be conflict-of-interest challenged. In 2010 I sat in on Senate hearings where Goldman’s CEO, Lloyd Goldfein, tried to rationalize away an investment instrument known as Abacus. Abacus was expressly designed to fail. Goldman not only knew it would fail, it bet heavily on failure---at the same time it was selling it to unsuspecting customers as a good investment. A billion dollars in penalties and civil and criminal cases in the wake of that sorry episode apparently weren’t enough to encourage Goldman to take conflict of interest more seriously.

When Segarra tried to bring a Fed action to get Goldman’s attention her supervisor pressed her hard not to. When she didn’t relent, she was shown the door out. It’s all on tape. You can hear this story for yourself at ThisAmericanLife.org or read the story at ProPublica.org.

So what does the experience of one bank examiner in one Federal Reserve office overseeing one bank tell us? It’s a small sample. Or, it would be a small sample except for all of the other evidence of regulatory failure.

After the 2008 meltdown the head of the New York Fed hired David Beins, an outside banking expert, to investigate how on earth so many federal regulators could have missed the signs that a Depression-like crash was coming. Among other things, Beins pointed toward things like “regulatory capture” and “risk aversion.” That is, the cops got too cozy with the crooks. They either didn’t want to blow the whistle because they golfed together, or because they feared personal consequences.

What the meltdown should have proved, according to Beins, was that bank boards of directors and staff can’t be trusted to manage their own risks. The pressure for profits is just too great. Serious oversight is needed to protect the public interest. Not just power on paper, but power that is responsibly exercised. The financial equivalent of what we hear constantly from Homeland Security: “If you see something, say something.”

The Dodd-Frank Act amped up the Federal Reserve’s authority to oversee the banks and gave it more power to act to head of dangerous consequences. The alarm bell from the Segarra tapes is that many of the Fed’s most senior examiners apparently haven’t yet got that memo.

Goldman’s rap sheet of laws violated and penalties paid runs into the tens of billions of dollars. Hardly a month goes by without news of how the mega-banks rigged interest rates, or misled investors, or illegally foreclosed on mortgages. The culture seems to be that anything goes as long as the profits exceed whatever fines might follow.

We once thought of banks as places where we deposit money, the collective deposits get responsibly invested in business growth, home mortgages and other productive areas and banks make a reasonable profit for that service. With most banks, in most communities, that still happens.

Then there are goliaths like Goldman, JPMorgan Chase and others who control vast supplies of raw materials, power sources and have a choke-hold on finances worldwide. And these are not just benign managers of vital resources. Last year we learned that Goldman Sachs was artificially creating shortages of important metals so it could milk more rental income from warehouses that it owns. J.P Morgan Chase was caught rigging electrical rates in California and other Western states---the very same illegal activity that marked Enron’s brief and sorry history.

Rolling Stone writer Matt Taibbi years ago described Goldman this way: “The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money."

Under any reasonable definition, Goldman no longer is a “bank.” In fact, as the meltdown of 2008 amply demonstrates, it’s a menace.

Carmen Seggara’s tapes roll out the story of a Federal Reserve trusted with the power to control the danger, but itself cowed by the risks of exercising that power.

Barack Obama missed an historic opportunity back in 2009 to reform the mega-banks. Let’s hope that it won’t take another financial calamity for some future political leader to have the courage to correct that mistake.

(Joe Rothstein can be contacted at joe@einnews.com)



Joe Rothstein is a political strategist and media producer who worked in more than 200 campaigns for political office and political causes. He also has served as editor of the Anchorage Daily News and as an adjunct professor at George Washington University's Graduate School of Political Management. He has a master's degree in journalism from UCLA. Mr. Rothstein is the author of award-winning political thrillers, The Latina President and the Conspiracy to Destroy Her, The Salvation Project, and The Moment of Menace. For more information, please visit his website at https://www.joerothstein.net/.