'This American Life': Secret Recordings Suggest Lax Federal Oversight of Goldman Sachs

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A fired former Federal Reserve examiner secretly recorded 46 hours of conversation

Secretly recorded conversations of Federal Reserve officials purport to expose soft oversight of one of Wall Street's most imperturbable institutions: Goldman Sachs.

The recordings, dubbed the "Ray Rice video for the financial world," were released early Friday by ProPublica and National Public Radio's This American Life. They reveal a behind-the-scenes look at deliberations between two traditionally tight-lipped institutions — Goldman Sachs and the Federal Reserve — at an especially vulnerable time after the recent financial crisis.

Despite misgivings, Federal Reserve examiners did nothing to block a deal deemed "legal but shady" between Goldman Sachs and the Spanish bank Banco Santander. While not revealing outright smoking-gun corruption, the recordings reinforce the narrative that regulators were lax in their oversight of Wall Street in the period immediately following the crippling financial crisis of 2008.

The tapes were recorded by former Fed examiner Carmen Segarra and revealed as part of a wrongful termination lawsuit. Segarra alleges she was fired for refusing to change a negative finding about Goldman Sachs. They were released Friday as part of a story investigating how the Fed's own culture prevents it from properly regulating Wall Street. (Segarra's lawsuit was dismissed by a New York judge in April for failing to meet whistleblower status and is currently being appealed.)

Segarra was part of a Federal Reserve team that worked as regulators at Goldman Sachs post-crisis. Much of the recordings focus on the aforementioned deal, which was brought to the team's attention in January 2012. In discussing the deal, Segarra's supervisor, Mike Silva, was recorded saying: "My own personal thinking right now is that we’re looking at a transaction that’s legal but shady. I want to put a big shot across their bow on that. Poking at it, maybe we find something even shadier than we already know. So let’s poke at this thing, let’s poke at it with our usual poker faces, you know. I’d like these guys to come away from this meeting confused as to what we think about it. I want to keep them nervous."

At the time, the European banks were also in a precarious position and were under pressure to increase their capital requirements. Santander wanted to transfer some shares in a Brazilian subsidiary to Goldman in order to reduce the amount of capital it needed to maintain. Goldman would hold the shares for a few years, then return them, in exchange for a fee of $40 million, with the upside of possibly hundreds of millions in additional fees in trades on the shares. 

As documented in the recordings, the deal troubled the regulators. Silva is heard telling his team: "It's pretty apparent when you think this thing through that it's basically window dressing that's designed to help Banco Santander artificially enhance its capital position," or appear healthier than it was. One of Silva's colleagues said Goldman was "getting paid to watch a briefcase." 

In the This American Life interview in which the recordings are disclosed and explained, ProPublica's Jake Bernstein says the Fed officials believed the deal required their approval via a so-called "no contest" clause. However, the deal closed without any recorded objection from the Fed. Bernstein says in the TAL episode, "They claimed that the clause didn’t actually require them to get Fed approval. It just seemed that way." Instead of voicing his concerns or disapproval to Goldman execs, the only recorded comments from Silva contesting the "shady" deal were: “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 … ?”

On TAL, Segarra then sighs and says: "That's what passes for 'poking' at the Fed."

In a statement obtained by The Hollywood Reporter, Goldman Sachs says Segarra, a graduate of Harvard, The Sorbonne and Cornell Law who worked on Wall Street for over a decade, "unsuccessfully interviewed for employment at Goldman in 2007, 2008 and 2009." The statement also addresses Segarra's claims that Goldman lacked a written conflict of interest policy: "A quick Google search, however, shows publicly available Goldman Sachs documents outlining the management of conflicts.

"To get a balanced view of her claims, you should read what the senior Federal Reserve supervisor with oversight responsibilities for GS wrote (see below) after discovering that what she had said about Goldman was just plain wrong,“ the statement continues.

The Fed also disputes claims of lax regulation. "The New York Fed categorically rejects the allegations being made about the integrity of its supervision of financial institutions," it said in a statement to THR. "Ms. Segarra was employed by the New York Fed for less than seven months during 2011-12 and had no previous experience as an examiner. Further, she demanded $7 million to settle her complaint. Ms. Segarra’s concerns regarding the supervised firm’s conflict of interest policy were taken seriously and escalated by senior members of the team as evidenced by her own filings to the Court."

Segerra's lawyer Linda Stengle released a statement to THR stating: "Carmen stands by her allegations against the New York Fed. The audio on the tapes speaks for itself. Regardless of whether our case proceeds on appeal, we are gratified that Carmen is vindicated by the recorded words of employees of Goldman Sachs and the New York Fed."

Email: Soo.Youn@THR.com
Twitter: @lalasoo