Coverage: Goldman scandal prompts Fed review
It hasn’t been a good quarter for the Federal Reserve. First a former regulatory accused the agency of being lenient on large banks. Then there were the leaked documents to Goldman Sachs. All this is prompting the Fed to take a closer look at its own policies.
The Wall Street Journal had this story by Ryan Tracy and Victoria McGrane:
The Federal Reserve launched a sweeping review of its practices for supervising big banks, a move that comes in response to accusations its internal culture stifles dissent.
The Fed said the review is focused on whether senior staff are privy to enough information when they make decisions impacting the very largest financial firms, including “whether channels exist for decision makers to be aware of divergent views.” A team of Fed staff as well as the Fed’s inspector general will look into the matter separately, the Fed said.
The move comes amid growing criticism from lawmakers and others that the Fed is too close to Wall Street and that its examiners are not objective enough about the big banks they oversee.
That criticism, which had begun to simmer several years after the 2008 financial crisis, flared up in recent weeks after a former examiner at the Federal Reserve Bank of New York said her desire to get tough on Goldman Sachs Group , Inc. was in several instances stifled by her supervisors. The examiner, Carmen Segarra, also released recordings of internal Fed meetings that painted the regulator as unwilling to stand up to Goldman.
The New York Fed has denied those accusations.
Jessica Silver-Greenberg, Ben Protess and Peter Eavis wrote for The New York Times that leaked documents gave a Goldman banker insight into how the Fed was looking at a bank client:
From his desk in Lower Manhattan, a banker at Goldman Sachs thumbed through confidential documents — courtesy of a source inside the United States government.
The banker came to Goldman through the so-called revolving door, the symbolic portal that connects financial regulators to Wall Street. He joined in July after spending seven years as a regulator at the Federal Reserve Bank of New York, the government’s front line in overseeing the financial industry. He received the confidential information, lawyers briefed on the matter suspect, from a former colleague who was still working at the New York Fed.
The previously unreported leak, recounted in interviews with the lawyers briefed on the matter who spoke anonymously because the episode is not public, illustrates the blurred lines between Wall Street and the government — and the potential conflicts of interest that can result. When Goldman hired the former New York Fed regulator, who is 29, it assigned him to advise the same type of banks that he once policed. And the banker obtained confidential information, along with several publicly available facts, in the course of assignments from his bosses at Goldman, the lawyers said.
The information provided Goldman a window into the New York Fed’s private insights, the lawyers said, including details about at least one of Goldman’s clients, a midsize bank regulated by the Fed. Although it is unclear how Goldman bankers used the information, if at all, the confidential details could have helped them advise the client.
Bloomberg’s Christopher Condon and Jeff Kearns said Congress was ready to hear testimony about the breach and the Fed’s relationships:
A U.S. Senate committee is set to hear testimony tomorrow from New York Fed President William C. Dudley on the reserve bank’s relationship with the firms it regulates. The bank has been accused of being too deferential to banks it supervises, including Goldman Sachs Group Inc.
“We understand the risks of doing our job poorly and of becoming too close to the firms we supervise,” Dudley will say, according to the text of his remarks released today by the Senate Banking Committee. “We are not perfect. We cannot catch or correct every error by a financial institution, and we sometimes make mistakes.”
Fed General Counsel Scott Alvarez and Michael Gibson, head of the Division of Banking Supervision and Regulation, asked Inspector General Mark Bialek in a Nov. 17 letter released with the statement to review examinations of bank holding companies with total assets exceeding $50 billion.
Writing for Reuters, Tanya Agrawal said that Goldman had a policy against employees using information obtained from former employers:
The “revolving door” relationship between Goldman and other government agencies such as the New York Fed has been a source of criticism in the past, with frequent movement of employees between the bank and its regulators.
Current New York Fed President William Dudley, for example, was Goldman’s chief economist until 2005.
In an internal memo obtained by Reuters, Goldman said the proper handling of confidential information was among its highest priorities and that it had a specific policy prohibiting an employee’s use of information obtained from former employers.
Goldman added that it was reviewing its policies regarding hiring staff from government institutions to ensure they were effective and robust.
The New York Fed said in a statement it had detailed rules and controls for protecting confidential information.
“Of course, we also know that we are not perfect, that information today is more difficult to safeguard, and we are resolute to learn from our experiences.”
Policy or not, the information was leaked, and the Fed has a lot of explaining to do. The undercover tapes about not cracking down on Goldman hurt credibility, but this second scandal involving the bank must make everyone nervous. The Senate hearing is likely to be highly contentious and full of lawmaker posturing. Whether policies actually change remains to be seen.