November 23rd, 2014
by Jake Bernstein, ProPublica.org
For almost two hours Friday, the president of the Federal Reserve Bank of New York defended heated assertions from Democratic senators that his institution is too cozy with big banks to be an effective guardian of the financial system.
At times stammering and flustered, New York Fed President Bill Dudley stood behind the work of his staff and insisted that the nation's too-big-to-fail banks were safer for it.
The Senate Subcommittee on Financial Institutions and Consumer Protection called the hearing to explore issues of regulatory capture in light of reports by ProPublica and This American Life and other news media that the New York Fed had failed to act aggressively in the face of suspect transactions or questions raised by its examiners.
But Dudley insisted the New York Fed had adopted an array of changes since the 2008 financial crisis, including steps to remedy what a 2009 study said was a culture of deference and unwillingness to hear dissenting views.
"We should be judged on where the banking industry is today versus where it was six years ago, I think we've made a lot of progress. Are we where we want to be? Absolutely not."
He also pointed to yesterday's announcement by the Federal Reserve Board that it had launched reviews of its supervisory procedures involving big banks, to be conducted both internally and by the Fed's inspector general's office.
No Republican senators attended Friday's session, leaving Dudley to confront a handful of Democrats who took turns firing off one series of skeptical questions after another.
Chairman Sherrod Brown of Ohio described Dudley's written testimony as "a sunny description" belied by a lack of public confidence in financial regulators. Sen. Jeff Merkley of Oregon termed Dudley's defense of the New York Fed "a very glib presentation of everything being wonderful."
Dudley disagreed that the New York Fed's role is to police Wall Street, describing it more like that of a "fire warden" to ensure the financial system "does not catch on fire and burn down." In several sharp exchanges with Massachusetts Sen. Elizabeth Warren, he declined to concede that the New York Fed's culture contributed to weak oversight.
"Is there a cultural problem at the New York Fed? I'm convinced there is. I think the evidence says that there is, You need to fix it Mr. Dudley, or we need to get someone who will."
Questioning at several points touched on incidents involving Carmen Segarra, a former New York Fed examiner who secretly recorded some 46 hours of meetings while embedded at Goldman Sachs in 2012. Segarra, part of a new wave of specialists hired by the New York Fed after the financial crisis, was fired after seven months on the job.
A week before her dismissal, Segarra's supervisor tried repeatedly to convince her to change her views on whether Goldman Sachs had a conflicts-of-interest policy. Segarra contends in a lawsuit that she was fired for refusing to budge, an accusation the New York Fed has denied. Her case was dismissed but is on appeal.
Asked about the incident, one that Segarra recorded, Dudley said supervisor Michael Silva and others had concluded that Goldman did, in fact, have a conflicts-of-interest policy but were trying to turn the discussion to whether it was a good one.
Dudley said "this issue was vetted" inside the bank and that the problem was Segarra's "lack of a willingness to agree" with her supervisors that Goldman did have a policy. Previously the New York Fed has declined to comment on the recordings on grounds that they contain confidential supervisory information.
Segarra was not invited to testify at the hearing but sat in the audience scribbling notes as Dudley and the senators talked about events she had witnessed in her seven-month tenure at the New York Fed. They included deliberations about a transaction involving the Spanish bank, Banco Santander, that also were captured on Segarra's recordings.
In early 2012, Goldman and Santander arranged a deal to help the Spanish bank achieve capital levels demanded by European regulators. Senators asked whether the Fed should have taken a stronger stance on what Silva, the head Fed supervisor embedded at Goldman, had called a "legal but shady" transaction.
Dudley said the deal was thoroughly reviewed, found to be legal and did not pose a reputational risk to Goldman. Under questioning from Warren, he said he did not know if the New York Fed ever notified European banking authorities but that the Bank of Spain was informed about the deal.
One clause in the deal seemed to require pre-approval by the New York Fed. "The implication that we were somehow approving the transaction is false," Dudley said. Yet the New York Fed did review other transactions to ensure that Goldman was not making similar claims elsewhere, he said.
Three expert witnesses followed Dudley, including David Beim, a Columbia University professor who led the 2009 investigation into the New York Fed's regulatory culture.
Beim said the most important thing Congress could do to reduce the odds of regulatory capture – when government watchdogs get too close to the institutions they oversee – is to strengthen revolving door rules. The existing one-year wait required before regulators can work at bank they supervised should be extended to three years, he said.
Beim said Segarra's experience of feeling pressured by superiors "illustrated in Technicolor" the cultural issues his 2009 study uncovered at the New York Fed. "It does suggest to me ... continuing problems," he said.
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