Sachs Tapes

September 26, 2014 4:44 AM

The NY Federal Reserve is supposed to monitor big banks and prevent another financial crisis. But when Carmen Segarra was hired, what she witnessed inside the Fed was so alarming that she bought a tiny recorder, and started secretly taping. This American Life reports.

Inside the New York Fed: Secret Recordings and a Culture Clash
The Secret Goldman Sachs Tapes by Michael Lewis
2009 08 18 FRBNY Report on Systemic Risk and Bank Supervision Draft [PDF via ProPublica]

posted by chavenet (60 comments total)

Too big to jail.

I haven't yet read *these*, though I've read a few, as well as watching the two good movies out on the crash, Margin Call and ... dangit. Hard to read / watch / hear and not get angry and sick to my stomach all over again.
posted by Buttons Bellbottom at 4:51 AM on September 26, 2014

Wow. Reading through various accounts of the crash, I'd seen that certain bank regulators, like the Office of Thrift Supervision, were notoriously captured by the banks they were supposed to be regulating, and certain prosecutors were as well (see "too big to jail"). And I knew Geithner didn't seem particularly concerned about the problems of normal Americans.

But I had no idea the depth of cultural and institutional dysfunction at all levels in the Fed.
posted by shivohum at 5:12 AM on September 26, 2014

In that bloomberg article you can actually hear them clutching their pearls.

The revelation that these human institutions have systemic problems that are more social in nature is amusing to me.

My takeaway is how the financial systems have reacted to regulation over the years to embrace and extend. The regulators have become part of the banking system such that that banks need them now.

There's some leverage in there, somewhere.
posted by clvrmnky at 5:13 AM on September 26, 2014 [1 favorite]

At least over there in the US some people have ended up in jail - good luck trying to get any of the slippery bastards on this side of the pond.
posted by GallonOfAlan at 5:15 AM on September 26, 2014

Think what you will about Iceland; they prosecuted their bankers.
posted by GenjiandProust at 5:25 AM on September 26, 2014 [38 favorites]

Holy crap. They're letting the big banks get away with murder because they're afraid of tone arguments? That regulators are too mean to the people they're regulating when they find wrongdoing - and because they're finding wrongdoing? They're firing top-flight investigators because they, and I quote, "refuse to substitute their own judgement for everyone elses'"?

I don't even.
posted by Slap*Happy at 5:29 AM on September 26, 2014 [18 favorites]

God bless tiny tape recorders.
posted by Going To Maine at 5:30 AM on September 26, 2014 [10 favorites]

I'm having Elliott Ness daydreams. A few good regulators who can't be bought, can't be threatened...
posted by justsomebodythatyouusedtoknow at 5:31 AM on September 26, 2014 [2 favorites]

I'm having Elliott Ness daydreams. A few good regulators who can't be bought, can't be threatened...

They will just be caught themselves for breaking some unrelated law by the massive surveillance network that is available for people with power. See the AG who had the temerity to enforce some laws on the street who got caught transferring money for hookers by an anti-terrorism bank account monitoring measure. The system will Spitzer out anyone who opposes it.
posted by srboisvert at 5:37 AM on September 26, 2014 [16 favorites]

"I'm here to change the definition of what a good job is," Kim said. "There are two parts it: Actually producing the results, which I think you're very capable of producing the results. But also be mindful of enfolding people and defusing situations, making sure that people feel like they're heard and respected."

This cognitive dissonance brought to you by this-man's-salary-and-career-trajectory-depending-on-it.
posted by Slackermagee at 5:39 AM on September 26, 2014 [4 favorites]

Interesting thought experiment: What if for a month or so (maybe even a year; whatever time period you want) the divisions of law enforcement charged with arresting and prosecuting white collar crime switched places with the uniformed officers across the US. Sort of a law enforcement Wife Swap, if you will. I have a feeling the net effect would be quite positive.

"But sir, we can't arrest him! He supplies high-quality pot to half of New York! There'd be riots in the streets, not to mention who would support his wife and kids?"

"I know he was just reaching for his Rolodex. But at the time I thought it might be a weapon and I felt threatened, so I had no choice but to empty two clips into him and take out half the board of directors in the process."
posted by TedW at 5:42 AM on September 26, 2014 [95 favorites]

I'm certain this damning evidence from a whistle-blower will effect change; look how effective Edward Snowden was at eliminating NSA over-reach.

wait no

At some point the system is so rigged and bought-out that these types of things don't matter, they just produce some temporary shame-faced ass-covering until it all blows over.
posted by leotrotsky at 5:47 AM on September 26, 2014 [10 favorites]

Interesting thought experiment: What if for a month or so (maybe even a year; whatever time period you want) the divisions of law enforcement charged with arresting and prosecuting white collar crime switched places with the uniformed officers across the US. Sort of a law enforcement Wife Swap, if you will. I have a feeling the net effect would be quite positive.

I have a feeling that most of the assumptions and attitudes are the same for both groups of enforcement officials. It's not as if the police routinely brutalize rich white dudes anywhere, and the chummy "we're all on the same side" attitude extended to banksters relies on shared class and ethnic markers.
posted by kewb at 5:52 AM on September 26, 2014 [3 favorites]

BRB, shorting Carmen Segarra.
posted by vapidave at 6:51 AM on September 26, 2014

Hey, remember that crazy old fart who kept going on and on about auditing the fed?
Previously.
posted by king walnut at 6:58 AM on September 26, 2014 [3 favorites]

...the Office of Thrift Supervision

Speed-read that as Office of Theft SUpervision.

Really, they make it too easy.
posted by IndigoJones at 6:59 AM on September 26, 2014 [3 favorites]

Exhibit #4523495.3 in the portfolio of "Reasons I Will Never Work In Finance Again."
posted by EmpressCallipygos at 7:07 AM on September 26, 2014 [4 favorites]

The people who regulate banks for the Fed are physically stationed inside the banks.

My employer has a sister company overseas, and it's surprising how much of a difference this sort of thing can make. When some of them are here and interacting with us face-to-face, we're quick to anticipate needs and do whatever they ask for. When they return home and our interaction with them is via email, we demand explanations for every request and don't proceed until we're completely satisfied. The attitude changes from positive and helpful to negative and suspicious.

I wonder if the same change would help regulators be more effective. Right now, they're in the bank's house, where the most important work is the bank's work, and the dominant senior figures are the bank's executives, and the natural human tendency to defer and cooperate with people we work with face-to-face kicks in. If the regulators were in their own facility and required written explanations for everything, I wonder if it would help them to develop a new attitude. It wouldn't solve all the problems of regulatory capture, but it might help create some of the psychological distance that's clearly lacking now.

If it worked, of course, the banks would complain vociferously that it was destroying their ability to be nimble and dynamic and all that, and they'd quickly schmooze with the right legislators to get things changed so that they'd have their on-site regulatory pets back again. But it would be an interesting experiment to try.
posted by clawsoon at 7:29 AM on September 26, 2014 [7 favorites]

I'm sorry the 'secret recorder' thing is now out there. Now everyone at the Fed will get searched for recorders or wires before entering high-level meetings.

See 'Abu Ghraib', where the big outcome was that grunts assigned to prison duty can't take pix.
posted by Artful Codger at 7:31 AM on September 26, 2014 [12 favorites]

Hey, remember that crazy old fart who kept going on and on about auditing the fed?

This was a threat to keep the Fed in line, to keep it from meddling in the affairs of financial institutions, and likely contributed to the culture of letting the banks do what they wanted to forestall Conservatives in congress dismantling the Fed.

So, no, Ron Paul was the problem, not the solution.
posted by Slap*Happy at 7:34 AM on September 26, 2014 [23 favorites]

king walnut: Hey, remember that crazy old fart who kept going on and on about auditing the fed?

GOOGLE REVISIONIST HISTORY
posted by tonycpsu at 7:46 AM on September 26, 2014 [13 favorites]

"But sir, we can't arrest him! He supplies high-quality pot to half of New York! There'd be riots in the streets, not to mention who would support his wife and kids?"

Dave Chappelle imagined this back in 2004. Warning: a dog gets fake-harmed in this clip.
posted by muddgirl at 7:47 AM on September 26, 2014 [9 favorites]

The Federal Reserve is neither Federal, nor a reserve. Discuss.
posted by Reasonably Everything Happens at 7:49 AM on September 26, 2014

The Federal Reserve is neither Federal, nor a reserve. Discuss.

But is it holly, Roman, or an empire?
posted by GenjiandProust at 7:59 AM on September 26, 2014 [2 favorites]

Clearly, that should be "holy." No one is silly enough to imagine the Fed would be holly, no matter how festive it might be bedecked.
posted by GenjiandProust at 8:14 AM on September 26, 2014 [2 favorites]

My God. If you listen to the entire episode, compare how Silva regulates his own employee over the suits at Goldman. What an incredibly sad state of affairs.
posted by phaedon at 8:16 AM on September 26, 2014 [3 favorites]

Your move, Senator Warren.
posted by schoolgirl report at 8:16 AM on September 26, 2014 [7 favorites]

Her lawsuit got dismissed because of limited applicable causes of action.

Government regulators don't work. You want regulation? Expand and liberalize civil claims. The civil justice system will compel change when proof of misconduct is occurring. Just look at dangerous products. The FDA approve dangerous drugs; people are injured and sue and eventually the drug is pulled. Same thing happens throughout the civil justice system. Unfortunately, we have so many limitations on civil claims that more is not possible. You allow people to sue the banks for their shenanigans, and you won't need regulators. The fear of the lawsuit is enough.
posted by dios at 8:20 AM on September 26, 2014 [1 favorite]

You're right, dios, poor people don't need protection from corporate crimes.
posted by cthuljew at 8:24 AM on September 26, 2014 [12 favorites]

Uh, where did I say that? I said the exact opposite. In case you don't understand what I am saying: let poor people sue for those corporate crimes. They'll get the justice they are not currently getting by relying on worthless regulators and protected regulatory schemes.
posted by dios at 8:28 AM on September 26, 2014 [1 favorite]

Same thing happens throughout the civil justice system. Unfortunately, we have so many limitations on civil claims that more is not possible. You allow people to sue the banks for their shenanigans, and you won't need regulators. The fear of the lawsuit is enough.

Those limitations exist in large part as an indirect result of lobbying, campaign donations, and general cronyism perpetrated by corporations. You just get all the bad effects of regulatory capture without the regulations.

So the whole ""gut regulations, but remove damage caps" thing doesn't actually work unless you're also ready to sign on for major restrictions to campaign financing and lobbying as well. Not coincidentally, those sorts of restrictions on lobbying and corporate or personal campaign donations would probably shut down "regulatory capture" issues in a lot of cases too.

Uh, where did I say that? I said the exact opposite. In case you don't understand what I am saying: let poor people sue for those corporate crimes. They'll get the justice they are not currently getting by relying on worthless regulators and protected regulatory schemes.

Lawyers cost money; by definition, poor people do not have this. Also, consider up-front court fees, loss of money and work hours involved in pursuing a legal case, and an often well-founded distrust and disillusionment with the legal apparatus on the part of people who've had miserable experiences with it in the past.

Your solutions seem to come from a set of pat concepts about how things should work which do not line up with most people's practical realities.
posted by kewb at 8:31 AM on September 26, 2014 [9 favorites]

dios: Where would they get the money to hire lawyers, much less lawyers who could compete with corporate ones?
posted by cthuljew at 8:32 AM on September 26, 2014 [7 favorites]

tonycpsu: GOOGLE REVISIONIST HISTORY

Are you implying Ron Paul didn't want to audit the fed?
Your google works differently than mine.
posted by king walnut at 8:36 AM on September 26, 2014

Motives matter, king walnut. Paul wants to audit the Fed in order to dismantle it and let the market sort everything out.
posted by feckless fecal fear mongering at 8:37 AM on September 26, 2014 [6 favorites]

king walnut: Are you implying Ron Paul didn't want to audit the fed?

Don't be obtuse. As Slap*Happy points out, the focus on the Fed was not in any way motivated by a desire for stronger regulation. Quite the opposite.
posted by tonycpsu at 8:38 AM on September 26, 2014 [5 favorites]

I write to report a tragedy: My notional superiors have failed to award me the $13 million they promised to me. I told you of this promise over Christmas, as you will soon remember. My spectacular decision to short the subprime mortgage market, after manipulating that market so that my short could take place at artificially high prices, is the stuff of legend. In spite of what many refer to as "The Triumph of Deeb," they have elected to pay me the disgraceful sum of $8.25 million, making vague promises to "make it up to me in the future."

Deeb the Conqueror..., linked from the Michael Lewis article, purports to be reproducing an email from a trader to his mom. But this has to be satire...doesn't it? (Please say yes.)
posted by GrammarMoses at 8:45 AM on September 26, 2014 [1 favorite]

dios: Where would they get the money to hire lawyers, much less lawyers who could compete with corporate ones?

Tort lawyers work on retainer for cases with a good potential for large settlements.
posted by leotrotsky at 8:45 AM on September 26, 2014

Government regulators don't work. You want regulation? Expand and liberalize civil claims.

The problem with this, of course, is that the Republican party is gutting civil claims via 'tort reform' and destroying class actions via the judiciary.
posted by leotrotsky at 8:49 AM on September 26, 2014 [8 favorites]

F.Y.I., the This American Life link autoplays when you click it. You can use this link to the original or just download the audio directly.
posted by Johann Georg Faust at 9:07 AM on September 26, 2014 [1 favorite]

Lawyers cost money; by definition, poor people do not have this. Also, consider up-front court fees, loss of money and work hours involved in pursuing a legal case, and an often well-founded distrust and disillusionment with the legal apparatus on the part of people who've had miserable experiences with it in the past.
posted by kewb at 10:31 AM on September 26

dios: Where would they get the money to hire lawyers, much less lawyers who could compete with corporate ones?
posted by cthuljew at 10:32 AM on September 26

I don't think you realize how the civil justice system works. Plaintiffs lawyers in civil cases who represent individuals almost always work for contingency fees. Basically, the attorneys pay the expenses and bill the people nothing unless and until a recovery is made and then get paid out of that. So no, lawyers don't cost money in the sense that poor people can't hire them. And many of the best lawyers in this country work this way, so the idea that somehow they would be incapable of competing with "corporate" attorneys is laughable.

I can promise you this: you permit civil claims for institutional malfeasance of this magnitude, you'll have the best attorneys in the country lining up to represent for free everyone screwed over. You'd have Steve Berman fighting with David Boies and others trying to be lead counsel on a class action. You'd have teams of firms ready to spend their money and time to go after them. And in that environment of extreme risk of civil claims, you'd have real changes at the banks who have been allowed to get away with stuff because of the absence of such risk.

I can tell you countless industries where regulators fail to adequately regulate the industry. But civil claims provide some incentive to be good corporate citizens despite being very limited. You open that up, you'll see change because it will threaten the pocketbook of the banks to act badly.
posted by dios at 9:36 AM on September 26, 2014 [3 favorites]

The problem with this, of course, is that the Republican party is gutting civil claims via 'tort reform' and destroying class actions via the judiciary.
posted by leotrotsky at 10:49 AM on September 26

This is sadly true. That's why I said you'd have to change that. Interestingly, there is some sense among trial lawyers that the "tea party" might be a useful ally to combat this. Presumably tea party people respect the 7th Amendment, so they should be opposed to tort reform. Moreover, they should be opposed to government regulation of markets, and what is more free market than an open and unregulated civil justice system where juries get to decide whatever is just. You don't like government regulation? Let's do away with regulations on business and the civil justice system and the let the people [read: consumers and juries] decide. So there is actually an effort, at least here in Texas, among trial lawyers to find some common ground there to combat pro-corporate-protection advocates.
posted by dios at 9:43 AM on September 26, 2014

You want regulation? Expand and liberalize civil claims.

This is the thesis of Laura Nader The Life of the Law.
posted by bukvich at 10:03 AM on September 26, 2014

> I can promise you this: you permit civil claims for institutional malfeasance of this magnitude, you'll have the best attorneys in the country lining up to represent for free...

The banks would add an agreement to binding arbitration as a requirement to invest with them. And financial industry reform through tort would go the same way labor reform has.
posted by ardgedee at 10:05 AM on September 26, 2014 [7 favorites]

I can promise you this: you permit civil claims for institutional malfeasance of this magnitude, you'll have the best attorneys in the country lining up to represent for free everyone screwed over.

And if it doesn't work out that way, we can always sue you for it!
posted by kewb at 10:08 AM on September 26, 2014 [1 favorite]

Government regulators don't work. You want regulation? Expand and liberalize civil claims.

This is an utter political impossibility. It goes against fundamental Republican ideology, and too many Democrats are in the pockets of the banks. This will never happen.
posted by mr_roboto at 10:13 AM on September 26, 2014 [2 favorites]

It goes against fundamental Republican ideology, and too many Democrats are in the pockets of the banks. This will never happen.

It occurs that this is such a depressing way of saying "this is a good idea".
posted by Pogo_Fuzzybutt at 11:43 AM on September 26, 2014 [8 favorites]

This is a great example of an arena where I really do want the machines to take over eventually. Financial matters can and should be regulated in a mathematically verifiable manner. You don't need hard AI to do this, but you do need a genuine desire to not fuck it up, which is totally absent in all public endeavor today.

It's not that the concept of regulations itself is flawed, although surely there are those would like nothing other than to focus the conversation in that direction, instead it is our ability to implement those regulations that is flawed. In the same way that our generals are always fighting the last war, our legislators are regulating the last crisis. We need something better than the neo-spoils system we currently have.
posted by feloniousmonk at 12:04 PM on September 26, 2014

The Fed’s regulators take on the classics, inspired by the Carmen Segarra tapes
posted by homunculus at 12:41 PM on September 26, 2014 [4 favorites]

“Just to button up one point. I know the term sheet called for a notice to your regulator. The original term sheet also called for expression of non-objection, sounds like that dropped out at some point, or … ?”

I do hope there is a Last Week Tonight segment on this and John Oliver reads out this line as an example of the Fed questioning Goldman Sachs ..

This line should be mocked by everyone.
posted by TheLittlePrince at 1:30 PM on September 26, 2014

Having just finished listening to this, I can't exactly say I'm surprised by anything revealed. I mean, most people watching closely more or less just assumed this was the way things worked, right? How could it not? Remember the robo-signing scandal? Break the law, make a ton of cash, pay some of it in fines and salaries for former regulators, cost of doing business.

You move pretty quickly from thinking "how is this legal" to knowing that question doesn't matter when you realize consequences never happen.

Also, the shocked tone of the Bloomberg article is a sickly-sweet blend of adorable naivete and fiendish disingenuity with a sticky foam of willful blindness on top.

It's telling to me that the whistleblowers are overwhelmingly women.
posted by [expletive deleted] at 1:38 PM on September 26, 2014 [2 favorites]

This is an utter political impossibility.

It would certainly take a broad bipartisan effort, perhaps unseen in this country since the New Deal coalition. Businesses have already figured out a loophole to get around the inability to buy tort reform, by working with government to eliminate the ability of individuals to pursue class action lawsuits and to force arbitration.

One cannot sue a mediator, after all, having agreed by default to all outcomes, terms and conditions of the small-print underlying most business and employer-employee transactions.

The US government greatly weakened the ability of citizens to pursue class action suits with AT&T Mobility v. Concepcion and Wal-Mart v. Dukes. It's a very steep hill to climb from here.
posted by a lungful of dragon at 3:49 PM on September 26, 2014 [2 favorites]

So......Goldman had a bunch of conflict of interest policies for its different divisions but didn't have a global one.

Scandal!
posted by jpe at 4:10 PM on September 26, 2014

That's, uh... That's not what the scandal is about....
posted by cthuljew at 4:23 PM on September 26, 2014 [3 favorites]

Your move, Senator Warren.

In about 20 years, when she'll have enough seniority to do something about this, I'm sure she'll get around to it.
posted by heathkit at 5:25 PM on September 26, 2014

@king_walnut: he said that because the standard Ron Paul-ite theory is that the Fed is incredibly powerful and uses it's immense power to force private business to do terrible things, and thus business should have more power.

Reality is that business already has too much power, they already abuse it, and the Fed is barely a speed bump.
posted by grudgebgon at 10:13 PM on September 26, 2014

hey, so there was an interesting debate last week between brad delong,* bob solow, tyler cowen and russ roberts that was nominally about thomas piketty but really just turned into a debate about the causes of inequality. the parts of interest for me was when the moderator brings up the topic of corruption at about the 32m mark, which was at first summarily dismissed, but then later returned to around the 59m mark in a great discussion about rents, financial rentierism and the euthanasia of the rentier.

but what does that entail? financial profits as a percentage of all domestic profits are back to around a third of the whole, which is still as absolutely fucking crazy as it was when simon johnson was writing about it five years ago and in the three decades prior:

From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

if you look at bank deposits vs. loans you'll see an enormous gap known as 'excess reserves' of which the federal reserve started paying interest on in 2008 to the banks (notice the difference between deposits and loans about equals excess reserves at the fed) which is free money to them that they've basically been sitting on ever since the global financial crisis. but the whole point, if you know how the economic machine works (18m), to unclogging the financial plumbing is that the capitalists and bankers (or ownership class and supermanagers, etc.) _know what they're doing_ in terms of allocating resources to their most productive uses for the benefit of society as a whole. what's happened instead of course is that they _know what they're doing_ and have decided/rationalized that the most productive use for the benefit of society as a whole it to give that money to themselves.

those are the broad strokes; here are some other ones to help fill in the details:
-Cathy O'Neil on Wall St and Occupy Wall Street
-Barry Ritholtz: The Biggest Lie of the New Century
-Michael Lewis: Occupational Hazards of Working on Wall Street

so again, what's the problem? another way to state it:

It is relatively simple and intuitive to make the connection between Fed policy and wealth inequality. Whether through open market operations or direct lending through the discount window the first recipients of newly created money are the banks in the Fed system... this newly created money is first lent to their most creditworthy customers. In addition, the amount one can borrow is obviously a direct function of one's already existing net worth so it is the "wealthy" who are able to borrow these newly created funds first and at the lowest rate of interest... Those with access to better economic information, such as bankers with access to the Federal Reserve, are able to better navigate this world of floating monetary standards and gain outsize economic rewards.

anyway, the way i see it there are a few ways to rectify the situation, none of which are mutually exclusive, but that all depend on taking on entrenched interests very much intent on maintaining the current system as it is, and with the resources and political machinery behind them to do so:

1. tax the wealthy (the piketty route)
2. basic income (of some form)
3. end the fed (and replace it w/... a guy in a shiny shirt who looks like he's from the future speaking in a large conference lounge on the enterprise about to get a drink afterward at ten foward?)

---
*who comes across as very smart, but a total dick (and i admire the guy and am ideologically aligned with him; you're doing great work!) part of it might be that when he was at the treasury he worked for larry summers -- who btw seems like he's on an apology tour for deregulating the financial system and is trying to make amends by making the case for more infrastructure spending -- altho cathy o'neil also apparently worked for summers as well when he was at d.e. shaw and look how she turned out :P
posted by kliuless at 9:41 AM on September 27, 2014 [13 favorites]

My grandmother was effectively a poor widow when she went to civil court to get my grandfather's expensive timber operation equipment back from the business partners who swindled him, but the judge ruled "what do you need it for?" and that was that. The court system is one of the best tools the rich have for screwing over the weak!
posted by saulgoodman at 5:00 PM on September 27, 2014

Just imagine if anyone had actually leaked the internal emails from Goldman-Sachs.
posted by jeffburdges at 6:41 PM on September 27, 2014

Your move, Senator Warren.

Senator Warren accepts your challenge.
posted by EmpressCallipygos at 9:08 AM on September 29, 2014

In other news: The audacity to 'fart in the elevator' and the lingering anger over the AIG bailout: The government gave AIG $180bn. The company’s former CEO is suing, claiming it robbed him of the value of his shares

‘Go F*ck Yourself’: Stewart Bashes AIG for Whining About Unfair Treatment in Gov’t Bailout
posted by homunculus at 10:18 PM on October 9, 2014 [1 favorite]