What If the Regulators Are As Bad As the Banks?

William “Bill” C. Dudley, president of the Federal Reserve Bank of New York Photo: Stephen Yang/Bloomberg via Getty Images

ProPublica and “This American Life” are out with a blockbuster story, so blockbuster they got none other than Michael Lewis to tease it. It is the tale of one Carmen Segarra, a former regulator for the Federal Reserve Bank of New York. A compliance specialist, Segarra was embedded in Goldman Sachs to ensure that the megabank followed the rules.

But Segarra’s story ends up being less about the bank’s issues than about the New York Fed’s. According to the report, the regulator’s employees demurred and hedged. They worried what Goldman thought of them. They softened their sharp edges. They dragged their feet. They feared seeming demanding. They lacked skepticism.

For instance, in an incident that seems to have contributed to Segarra’s firing less than a year after she started on the job, she questioned whether Goldman had an adequate conflict-of-interest policy, ultimately determining that it did not. Her superiors pressured her to change her finding. Soon after, they canned her.

Of course, Goldman strongly disputes Segarra’s version of events, as does the New York Fed. And of course, Segarra is not an impartial observer — she’s a disgruntled former employee. But the brilliant thing is that we do not have to take her word for any of it. Shocked by what she saw, Segarra snuck a recording device into work. There are two days’ worth of tape supporting her version of events.

That includes the implication that Segarra got fired in part for refusing to dull her sharp edges — for refusing to just go along, like the other regulators. In one meeting, one of Segarra’s bosses tells her she is succeeding at “actually producing the results,” but also needs to be “mindful of enfolding people and defusing situations, making sure that people feel like they’re heard and respected.” He warns her about “breaking eggs.”

The great irony is that the New York Fed, in the wake of the crisis, determined that its employees needed to break more eggs. In 2009, it commissioned a report to examine why it failed to stop the financial collapse, bringing in outside muscle to investigate and interview its staffers. One of the central problems, that report found, was that the banks’ employees were too submissive, consensus-focused, and risk-averse.

Segarra’s astonishing report indicates that might still be the case. That’s the thing: The Dodd-Frank law might have tightened the leash on the American financial system. But it won’t be any good at all if the regulators charged with acting in the public interest refuse to pull on it.

What If the Regulators Are As Bad As the Banks?