classical economics
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Fed Rolls for Goldman

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Secret Tapes Prove It, But So What?

By Wayne Jett © September 29, 2014

Michael Lewis reports for Bloomberg “a jaw dropping story” that “secret tape recordings” prove Goldman Sachs engages in serious wrongdoing repeatedly, while its principal regulator – the Federal Reserve – does nothing. This is news? Not in these parts. The Fed is the most ill-suited regulator of banks ever appointed by Congress, which greatly increased the Fed’s authority despite its central role in the financial terrorism of 2008.

Lewis alerts us to a capable, honest woman, Carmen Segarra, newly hired and appointed as the Fed’s case officer for Goldman. Promptly Segarra witnessed first-person admissions of deceitful, if not illegal, conduct by Goldman employees. Concurrently she was pressured by other Fed employees to ignore what she witnessed. So she took the initiative to carry a “bug” on her person. Segarra began recording important meetings and conversations. 

Taping the Fed and Goldman Sachs

One instance involved a big deal between Goldman and the Spanish giant, Banco Santander. Santander hid risk exposures from its regulator by off-loading them temporarily, for a large fee, to Goldman in a wash-transaction. The deal expressly required Goldman to get the Fed’s approval of the deal. Goldman merely sent a last-minute email telling the Fed a deal with Santander was closing. After learning the terms of the deal, despite Segarra’s objections, the Fed neither voided the deal nor reported it to Spanish regulators. 

A second instance involved Goldman taking a fee of $20 million for advising El Paso Gas about its acquisition by Kinder Morgan, while Goldman owned an undisclosed $4 billion stake in Kinder Morgan. Fed guidelines applicable to Goldman require each bank to have a written, firm-wide policy governing conflicts of interest. When Segarra learned of the El Paso deal, she asked to see Goldman’s company-wide conflicts policy. Goldman said it had no such policy.

The Perp Has a Rap Sheet

Before proceeding with the play-by-play of what happened next, let’s call the “conflict of interest” what it actually is:  big-time financial fraud. This is familiar ground for Goldman. Recall the July 15, 2010, announcement by the Securities & Exchange Commission that Goldman agreed to pay a “penalty” of $550 million. For what? For selling a subprime mortgage product to its customers without disclosing that hedge fund Paulson & Co., Inc., had selected the portfolio of assets in the product and had sold short the same product. 

In 2007, Goldman settled an SEC case involving Goldman permitting its hedge fund clients to mark their own short sale trading slips as “long” sales, thus avoiding the up-tick rule, throughout the “Tech-Crash” of 2000-2002. We could go on.

Knowing these points of historical context, what did the mighty, powerful, “independent” Fed do with its case officer’s finding that Goldman was out of compliance with “conflict of interest” requirements? The Fed overruled Segarra, insisting that Goldman had a conflict of interest policy but needed to “dramatically improve it.” Oh, and the Fed fired Segarra, only four months after hiring her to do precisely what she was attempting to do: enforce regulatory safeguards without fear or favor.

Culture and Justice in America

          Segarra was hired by the Fed as a consequence of an “internal study” of the New York Fed, which is responsible for regulating the big international banks of Wall Street. The study was performed by a former banker who now teaches at Columbia University, David Beim. Beim concluded the NY Fed pressured its employees to appease the big banks, so the problem was not financial failure but “cultural failure.”

          Two points may be worth making about these radio-show-worthy events – one point about “culture” and the other about justice in America.

          “Culture” merely reflects the manner in which humans adjust their conduct to perceived reality so as to survive and prosper. Reality for the NY Fed is that it is privately owned and controlled by the big banks – more specifically, by the same families who own and control the big banks. Professor Beim, for example, is notably acculturated to be delicate when addressing matters of big bank and Fed integrity.

Reality was known to leaders of both houses of Congress when they bestowed regulatory authority over the big banks upon the NY Fed. The same ruling families control the big banks, the NY Fed and lawmakers of Congress and the White House. Who would expect mere employees of the NY Fed to buck this reality while trying to collect a regular paycheck, especially when co-workers and superiors side with the big banks? Nobody, of course. That is why Congress and the president enacted and signed the law making the Fed regulator of the banks.

The point about justice in America has been made here before. A few people in America are above the law applied to others. This is expressly illustrated in the first of Segarra’s experiences described above. A Goldman official commented that federal consumer protection laws don’t apply to Goldman customers who have reached a certain level of wealth. Not true under the law, but another Fed official at the same meeting told Segarra “you didn’t hear that.”

This, too, is reality in America. Some people get to make their own laws as they go along, and are not touched or troubled merely because they transgress laws enforced against the rest of us. If the Fed defers to Goldman Sachs as to the propriety of its actions, you may be certain the Fed likewise defers to J. P. Morgan Chase and Citigroup.

Some may regard this as no concern of theirs, since they do no business with Chase, Goldman or Citigroup. But these firms and others who emulate them do important business in essentially every significant industry. Their activities affect share prices of many publicly traded companies, thus impacting the well-being of insurance companies, retirement plans and other vital public interests. Oh, and they get bailed out of their losses with tax revenues under the myth “too big to fail.”

“Justice for all” declared in the Pledge of Allegiance and “Equal Justice Under Law” inscribed over the entry of the Supreme Court are violated daily in many agencies of U. S. government, not only by the Fed. This is folly capable of bringing down governments and societies, if not timely rectified. ~




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