Regulatory Capture: The Banks and the System That They Have Corrupted

"But the impotence one feels today— an impotence we should never consider permanent— does not excuse one from remaining true to oneself, nor does it excuse capitulation to the enemy, what ever mask he may wear.  Not the one facing us across the frontier or the battle lines, which is not so much our enemy as our brothers’ enemy, but the one that calls itself our protector and makes us its slaves.  The worst betrayal will always be to subordinate ourselves to this Apparatus, and to trample underfoot, in its service, all human values in ourselves and in others."

Simone Weil


"And in some ways, it creates this false illusion that there are people out there looking out for the interest of taxpayers, the checks and balances that are built into the system are operational, when in fact they're not.  And what you're going to see and what we are seeing is it'll be a breakdown of those governmental institutions.  And you'll see governments that continue to have policies that feed the interests of -- and I don't want to get clichéd, but the one percent or the .1 percent -- to the detriment of everyone else...

If TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car... I think it's inevitable. I mean, I don't think how you can look at all the incentives that were in place going up to 2008 and see that in many ways they've only gotten worse and come to any other conclusion."

Neil Barofsky


"Written by Carmen Segarra, the petite lawyer turned bank examiner turned whistleblower turned one-woman swat team, the 340-page tome takes the reader along on her gut-wrenching workdays for an entire seven months inside one of the most powerful and corrupted watchdogs of the powerful and corrupted players on Wall Street – the Federal Reserve Bank of New York.

The days were literally gut-wrenching. Segarra reports that after months of being alternately gas-lighted and bullied at the New York Fed to whip her into the ranks of the corrupted, she had to go to a gastroenterologist and learned her stomach lining was gone.

She soldiered through her painful stomach ailments and secretly tape-recorded 46 hours of conversations between New York Fed officials and Goldman Sachs. After being fired for refusing to soften her examination opinion on Goldman Sachs, Segarra released the tapes to ProPublica and the radio program This American Life and the story went viral from there...

In a nutshell, the whoring works like this. There are huge financial incentives to go along, get along, and keep your mouth shut about fraud. The financial incentives encompass both the salary, pension and benefits at the New York Fed as well as the high-paying job waiting for you at a Wall Street bank or Wall Street law firm if you show you are a team player.

If the Democratic leadership of the House Financial Services Committee is smart, it will reopen the Senate’s aborted inquiry into the New York Fed’s labyrinthine conflicts of interest in supervising Wall Street and make removing that supervisory role a core component of the Democrat’s 2020 platform. Senator Bernie Sanders’ platform can certainly be expected to continue the accurate battle cry that 'the business model of Wall Street is fraud.'"

Pam Martens, Wall Street on Parade

This is a good example of both regulatory capture and the credibility trap that co-opts those who benefits from the system as it is, even if it is by turning a blind eye and saying nothing, going along to get along, taking the 'bullet or the bribe.'

Never assume that because a person, such as media analyst or reporter, is highly paid that they are somehow beyond the temptation to violate their trust.  Quite the contrary.   They do not believe that change can come because they have anaesthetized their integrity as a matter of convenience.  And when called upon, they will support and defend and excuse the system as it is, at first by their inaction, and then by their willing cooperation.

The corruption takes a person one seemingly innocuous decision and event at a time.  their separate their fingers, one by one, until they finally let their souls slip through and fall— and they belong to the darkness of this world.  And at the end of the day, for what?   A little more money, the patina of prestige and superiority, access to power?

Who then can stand against the world, when power and money are assumed and created out of nothing, and distributed in an unjust, interconnected system of favors and services, without duty and without honor?

And so those captured in this system excuse and accept their own part in it, for their personal benefit and professional ego and advancement, that heady feeling of sophistication and acceptance by the worldly.

It's an old story  It is so old that at times it seems as if distant, just a story from another time— a fable.   But it is real.  It is the very fundamental core of this reality.  It is the continuing struggle.

It is, in the end, the only thing that matters, the only triumph or personal tragedy.  It is the only consequence that you will dwell upon, when the husk is stripped bare, and you yourself face the only certainty in this world alone, and as your truly are.

Bill Cohan: The Truth About the Fed

"The truth is, although both incidents do reveal something about the way the powerful and famous get away with more stuff than the rest of us, there’s no real comparison. The Segarra Tapes actually reveal little or nothing that was not already known, assuming you have a shred of understanding how the Federal Reserve banks actually work. Nor is William Dudley, the president of the Federal Reserve Bank of New York, about to get pilloried in public like NFL Commissioner Roger Goodell.

Sorry, folks, but this is simply the way the New York Fed was designed to behave. The system of 12 Federal Reserve banks, established about 100 years ago by an act of Congress following secret meetings presided over by J.P. Morgan himself at an island off the coast of Georgia, has always existed for the benefit of the commercial and investment banks that created the system, that own the banks and that control their boards of directors.

To think that these banks exist for any other reason than to serve their Wall Street masters is complete folly. It has never been so and it will never be so – as long as the current system remains intact – despite what Segarra captured her bosses talking about on tape, without their knowledge."

William D. Cohan, Why the Fed Will Always Wimp Out On Goldman

NY Fed Joins War On Whistleblowers To Shield Goldman Sachs From Its Own Examiner

And this sort of egregious behaviour from a 'regulator.'  They argue out of both sides of their mouths whether Goldman is a 'bank' or not, in order to get what they want for...  Goldman.

The Fed is not a government agency, but a privately owned creature of the very Banks whom it is charged to regulate and restrain.

And as we have seen, over and over again, the Fed is not part of the solution, but has become very much a part of the problem in distorting the banking system in favour of a few powerful financial interests.

A Mangled Case of Justice on Wall Street
By Pam Martens
May 8, 2014

On October 10, 2013, bank examiner Carmen Segarra and her attorney, Linda Stengle of Boyertown, Pennsylvania, took on one of the mightiest and interconnected institutions on Wall Street: the Federal Reserve Bank of New York. They relied on the Federal court system, funded by the taxpayer, and a fair and impartial judge to level the playing field. Things got off to a promising start.

Segarra was a bank examiner at the Federal Reserve Bank of New York, a key regulator of Wall Street banks. She charged in her lawsuit that when she turned in a negative assessment of Goldman Sachs, she was bullied and intimidated by colleagues at the New York Fed to change her findings.

When she refused, she was terminated from her job in retaliation and escorted from the Fed premises, according to her lawsuit...

Read the entire story here.

Related: Judge Tosses Lawsuit of Fired NY Fed Examiner

Chris Whalen: Nothing Has Changed Because It's The Fraud and Corruption, Stupid

Chris Whalen provides a devastating analysis of the Financial Reform legislation, and then goes on to eviscerate the Federal Reserve as regulator.

"Even as the big banks make a public show for the media of implementing the new Dodd-Frank law with respect to limits on own account trading and spinning off private equity investments, these same firms are busily creating the next investment bubble on Wall Street -- this time focused on structured assets based upon corporate debt, Treasury bonds or nothing at all -- that is, pure derivatives."

What I resent most about this current climate are the whispering campaigns and not so subtle attacks on the whistleblowers and victims: the unemployed, the homeless, the dislocated. These use stereotypes, character assassination, prejudice, and the darker elements of the human soul.

The better educated and fortunate members of the middle class are too often too willing to stand by and permit this without lifting a finger or saying a word, sometimes because it is to their benefit, or so they think. That is a mistake, because as history as shown, it is only a matter of time before the predators come for them.

Enjoy.

Institutional Risk Analyst
Is Fed Supervision of Big Banks Really Changing?
By Chris Whalen

With the passage of the Dodd-Frank Wall Street reform legislation, many financial analysts and members of the press believe that investment banking revenues and resulting earnings are in danger, but nothing is further from the truth. The Volcker Rule and other limitations on the principal trading and investment activities of the largest universal banks.

It is not own account trading but the derivatives sales desks of the largest BHCs whence the trouble lies. Even as the big banks make a public show for the media of implementing the new Dodd-Frank law with respect to limits on own account trading and spinning off private equity investments, these same firms are busily creating the next investment bubble on Wall Street -- this time focused on structured assets based upon corporate debt, Treasury bonds or nothing at all -- that is, pure derivatives. Like the subprime deals where residential mortgages provided the basis, these transactions are being sold to all manner of investors, both institutional and retail. It is the perverse structure of the OTC markets and not the particular collateral used to define these transactions that creates systemic and institution specific risk.

One risk manager close to the action describes how the securities affiliates of some of the most prominent and well-respected U.S. BHCs are selling five-year structured transactions to retail investors. These deals promise enhanced yields that go well into double digits, but like the subprime debt and auction rate securities which have already caused hundreds of billions of dollars in losses to bank shareholders, the FDIC and the U.S. taxpayer, these securities are completely illiquid and often come with only minimal disclosure.

The dirty little secret of the Dodd-Frank legislation is that by failing to curtail the worst abuses of the OTC market in structured assets and derivatives, a financial ghetto that even today remains virtually unregulated, the Congress and the Fed are effectively even encouraging securities firms to act as de facto exchanges and thereby commit financial fraud. Allowing securities firms to originate complex structured securities without requiring SEC registration is a vast loophole that Senator Christopher Dodd (D-CT) and Rep. Barney Frank (D-MA) deliberately left open for their campaign contributors on Wall Street. But it must be noted these same firms have a captive, client relationship with the Fed and other regulators as well, thus a love triangle may be the most apt metaphor.

Of course retail investors love the higher yields on complex structured assets. Who can blame them for trying to get a higher yield than available on treasuries, while the Fed keeps rates at historic lows to, among other things, re-capitalize the zombie banks. The only trouble is that the firms originating these ersatz securities, as with the case of auction rate municipal securities, have no obligation to make markets in these OTC structured assets or even show clients a low-ball bid. And because of the bilateral nature of the OTC market, only the firm which originates the security will even provide an indicative valuation because the structures and models behind them are entirely opaque.

In fact, we already know of two hedge funds that are being established specifically to buy this crap from distressed retail investors as an when rates start to rise. The sponsors expect to make returns in high double digits by making a market for the clients of large BHCs who want to get out of these illiquid assets. But the one thing that you can be sure of is that nobody at the Fed or the other bank regulatory agencies know anything about this new bubble. As with the early warnings brought to the Fed about private loan origination and securitization activities as early as 2005, the central bank and other regulators are so entirely compromised by the political pull of the large banks that they will do nothing to get ahead of this new problem.

Consider a specific example:

Shall We Reward Incompetence? The Case of Sarah Dahlgren and the Fed of New York

Despite initial indications that Congress would reduce the scope of Federal Reserve's financial company supervision, in the end the Dodd-Frank legislation substantially increases the Federal Reserve's responsibility. Chairman Ben Bernanke and other Federal Reserve officials made the argument that the Fed's supervision function didn't do any worse than any other financial regulators -- an assertion we cannot validate. This combined with heavy lobbying by other Reserve Bank Presidents and the grudging acknowledgement to the Congress by Fed Chairman Bernanke and Fed Governor Daniel Tarullo that significant improvements are necessary ultimately won the day.

Given its second lease on regulatory life, one might expect that the Fed's bank supervision function would be gearing-up to take a fresh, smart, and tough line with respect to financial company oversight. However, a recent key supervisory officer appointment by the Federal Reserve Bank of New York (FRBNY) indicates this may not be the case. The largest and most important of regional Reserve Banks appears to be going back to the future with its choice of Sarah Dahlgren as Head of Supervision. See FRBNY press release link.

If the name sounds familiar, that's because Ms Dahlgren has been at the center of many of the Federal Reserve's most embarrassing failures in the area of bank supervision and in particular with respect to the failure of American International Group (AIG). Going back in time now and remembering the period before the crisis, Dahlgren typified the arrogance and refusal of Fed officials to acknowledge warnings from various members of the financial community that the subprime mortgage market was melting down after years of unsafe and unsound lending and underwriting practices by the largest banks. Roger Kubarych, a former economist for the FRBNY, described the refusal of Fed officials to acknowledge the crisis in a 2008 interview with The IRA ('Fed Chairmen and Presidents: Roundtable with Roger Kubarych and Richard Whalen', October 30, 2008).

"It makes me so mad to think back how ignorant, arrogant, and dismissive she was with people who knew what they were talking about pre-crisis," one former Fed colleague told The IRA. Dahlgren was running the AIG show for the FRBNY. She ignored the recommendations from the Fed's own advisors and the Board of the FRBNY that AIG counterparties be forced to take haircuts. For her to ignore good advice on AIG and then deliberately take steps to hide that decision from the Congress and the public, and then be rewarded with a promotion, is quite disheartening..."

Read the rest here.

Double Dip Est Arrivé: Institutional Risk Analyst

Chris Whalen of Institutional Risk Analyst has this interesting interview on CNBC, sent to me by a reader.

I have not watched that television channel in some years, finding their shallowness and hypocrisy too much to bear. Of course my refuge, Bloomberg Television, has lowered its standards so much, with spokesmodels and smirking chimps, that it may have achieved parity. Are Cramer, Kudlow and Kernan still kicking? Remarkable.

This is an interesting exposition of the currency wars, and the pandering to the big financial institutions by the Fed over the past fifteen years, ultimately at the expense of the real economy in the distortions and misallocation of capital which the financial engineers have fostered.

Here is the interview with Jim Rickards to which Chris alludes.



Chris Whalen sounds like me. I wonder if he can cook?

NY Fed Implicated in the Accounting Fraud at Lehman

Quite a bombshell from Yves Smith of Naked Capitalism tonight.

I wonder if the US mainstream media will ignore and dismiss it as they did the exclusion of the Wall Street banks from European debt sales in response to their fraudulent CDO sales. Is there a 'reverse gear' on the Voice of America?

In response, let's see if Chris Dodd puts the Consumer Protection section of the financial reform legislation under the control of a private organization,the Fed, which is owned by the institutions it is supposed to be regulating, and which is now implicated in the failure and fraud that helped to trigger the recent financial crisis.

The senior Republicans on the committee have insisted that it be. Originally Senator Dodd seemed to be going along with that in the spirit of bipartisan support for the monied interests and the financial lobbyists. That would be the perfect Orwellian twist to an increasingly surreal decline in the observance of the Constitution and the rule of law.

And then of course there is Turbo Tim, knee deep again in messy conflicts of interest and crony capitalism. The "CEO defense" claiming attention deficit disorder and blissful aloofness is in fashion among highly paid US executives. Considering Mr. Geithner's record, even in the execution of his own tax returns, the incompetence defense might be plausible. But it then calls into question the judgement of the person who subsequently appointed Tim to be the head of the most powerful financial organization on earth, the US Treasury.

Call the New Yorker. Time for another media PR blitz, but this one is for the Chief.

Naked Capitalism
NY Fed Under Geithner Implicated in Lehman Accounting Fraud

Quite a few observers, including this blogger, have been stunned and frustrated at the refusal to investigate what was almost certain accounting fraud at Lehman. Despite the bankruptcy administrator’s effort to blame the gaping hole in Lehman’s balance sheet on its disorderly collapse, the idea that the firm, which was by its own accounts solvent, would suddenly spring a roughly $130+ billion hole in its $660 balance sheet, is simply implausible on its face. Indeed, it was such common knowledge in the Lehman flailing about period that Lehman’s accounts were such that Hank Paulson’s recent book mentions repeatedly that Lehman’s valuations were phony as if it were no big deal.

Well, it is folks, as a newly-released examiner’s report by Anton Valukas in connection with the Lehman bankruptcy makes clear. The unraveling isn’t merely implicating Fuld and his recent succession of CFOs, or its accounting firm, Ernst & Young, as might be expected. It also emerges that the NY Fed, and thus Timothy Geithner, were at a minimum massively derelict in the performance of their duties, and may well be culpable in aiding and abetting Lehman in accounting fraud and Sarbox violations.

We need to demand an immediate release of the e-mails, phone records, and meeting notes from the NY Fed and key Lehman principals regarding the NY Fed’s review of Lehman’s solvency. If, as things appear now, Lehman was allowed by the Fed’s inaction to remain in business, when the Fed should have insisted on a wind-down (and the failed Barclay’s said this was not infeasible: even an orderly bankruptcy would have been preferable, as Harvey Miller, who handled the Lehman BK filing has made clear; a good bank/bad bank structure, with a Fed backstop of the bad bank, would have been an option if the Fed’s justification for inaction was systemic risk), the NY Fed at a minimum helped perpetuate a fraud on investors and counter parties.

This pattern further suggests the Fed, which by its charter is tasked to promote the safety and soundness of the banking system, instead, via its collusion with Lehman management, operated to protect particular actors to the detriment of the public at large.

And most important, it says that the NY Fed, and likely Geithner himself, undermined, perhaps even violated, laws designed to protect investors and markets. If so, he is not fit to be Treasury secretary or hold any office related to financial supervision and should resign immediately...

Read the rest of the story here.

Employment Numbers Surge (at the New York Fed) To Manage Its Bank Subsidy Programs

It is good to see that the downturn in employment is being counteracted by robust hiring and promotion in the cost-plus, quasi-governmental, financial service sector, or more specifically, a bull market in central banks managing subidies to the banking sector.

It appears that this flurry of promotions and hiring is for the new group that will oversee the bank's investments in Maiden Lane III and of course, AIG.

Ah, to be employed in a cost plus monopoly. What a sinecure.

NY Fed
New York Fed Creates New Group and Names Sarah J. Dahlgren Executive Vice President and Head of Group
January 21, 2010

NEW YORK—William C. Dudley, president and chief executive officer of the Federal Reserve Bank of New York, announced today the formation of a new Special Investments Management Group. The Bank’s board of directors promoted Sarah J. Dahlgren to executive vice president and named her as head of the new group. She will also become a member of the Bank’s Management Committee.

This move represents an additional enhancement to the Bank’s governance and risk management in light of the tremendous expansion of the Bank’s balance sheet over the past eighteen months by separating out the management of the new investments from the Bank’s financial risk management. Among the Group’s responsibilities will be managing the Bank’s credit extension to AIG and its Maiden Lane LLC portfolios.

Ms. Dahlgren has been the senior vice president in charge of the AIG relationship since September 2008. Prior to that, Ms. Dahlgren was responsible for the relationship management function in the Bank Supervision Group, with oversight responsibility for the Group’s portfolios of domestic and foreign banking organizations. Previously, Ms. Dahlgren was responsible for the Bank Supervision Group’s information technology and payments systems exam programs, as well as its Year 2000 readiness efforts....

NY Fed
New York Fed Names Seven Senior Vice Presidents and Ten Vice Presidents
January 21, 2010

NEW YORK – The Federal Reserve Bank of New York announced that its board of directors has approved the promotion of seven senior vice presidents and ten vice presidents.

NY Fed
New York Fed Names 11 Assistant Vice Presidents and 29 Officers
January 21, 2010

NEW YORK—The Federal Reserve Bank of New York announced that its board of directors has approved the promotion of eleven officers to assistant vice president and named twenty-nine new officers at the Bank.