Friday, September 26, 2014
The Secret Goldman Sachs Tapes
Michael Lewis
112 Sept 26, 2014 6:03 AM EDT
By Michael Lewis
a
A
(Updates fourth paragraph to include reference to ProPublica article containing Carmen Segarra's allegations.)
Probably most people would agree that the people paid by the U.S. government to regulate Wall Street have had their difficulties. Most people would probably also agree on two reasons those difficulties seem only to be growing: an ever-more complex financial system that regulators must have explained to them by the financiers who create it, and the ever-more common practice among regulators of leaving their government jobs for much higher paying jobs at the very banks they were once meant to regulate. Wall Street's regulators are people who are paid by Wall Street to accept Wall Street's explanations of itself, and who have little ability to defend themselves from those explanations.
Our financial regulatory system is obviously dysfunctional. But because the subject is so tedious, and the details so complicated, the public doesn't pay it much attention.
That may very well change today, for today -- Friday, Sept. 26 --- the radio program "This American Life" will air a jaw-dropping story about Wall Street regulation, and the public will have no trouble at all understanding it.
The reporter, Jake Bernstein, has obtained 46 hours of tape recordings, made secretly by a Federal Reserve employee, of conversations within the Fed, and between the Fed and Goldman Sachs. The Ray Rice video for the financial sector has arrived.
First, a bit of background -- which you might get equally well from today's broadcast as well as from this article by ProPublica. After the 2008 financial crisis, the New York Fed, now the chief U.S. bank regulator, commissioned a study of itself. This study, which the Fed also intended to keep to itself, set out to understand why the Fed hadn't spotted the insane and destructive behavior inside the big banks, and stopped it before it got out of control. The "discussion draft" of the Fed's internal study, led by a Columbia Business School professor and former banker named David Beim, was sent to the Fed on Aug. 18, 2009.
It's an extraordinary document. There is not space here to do it justice, but the gist is this: The Fed failed to regulate the banks because it did not encourage its employees to ask questions, to speak their minds or to point out problems.
Just the opposite: The Fed encourages its employees to keep their heads down, to obey their managers and to appease the banks. That is, bank regulators failed to do their jobs properly not because they lacked the tools but because they were discouraged from using them.
The report quotes Fed employees saying things like, "until I know what my boss thinks I don't want to tell you," and "no one feels individually accountable for financial crisis mistakes because management is through consensus." Beim was himself surprised that what he thought was going to be an investigation of financial failure was actually a story of cultural failure.
Read more: Michael Lewis on the occupational hazards of working on Wall Street
Any Fed manager who read the Beim report, and who wanted to fix his institution, or merely cover his ass, would instantly have set out to hire strong-willed, independent-minded people who were willing to speak their minds, and set them loose on our financial sector. The Fed does not appear to have done this, at least not intentionally. But in late 2011, as those managers staffed up to take on the greater bank regulatory role given to them by the Dodd-Frank legislation, they hired a bunch of new people and one of them was a strong-willed, independent-minded woman named Carmen Segarra.
I've never met Segarra, but she comes across on the broadcast as a likable combination of good-humored and principled. "This American Life" also interviewed people who had worked with her, before she arrived at the Fed, who describe her as smart and occasionally blunt, but never unprofessional. She is obviously bright and inquisitive: speaks four languages, holds degrees from Harvard, Cornell and Columbia. She is also obviously knowledgeable: Before going to work at the Fed, she worked directly, and successfully, for the legal and compliance departments of big banks. She went to work for the Fed after the financial crisis, she says, only because she thought she had the ability to help the Fed to fix the system.
In early 2012, Segarra was assigned to regulate Goldman Sachs, and so was installed inside Goldman. (The people who regulate banks for the Fed are physically stationed inside the banks.)
The job right from the start seems to have been different from what she had imagined: In meetings, Fed employees would defer to the Goldman people; if one of the Goldman people said something revealing or even alarming, the other Fed employees in the meeting would either ignore or downplay it. For instance, in one meeting a Goldman employee expressed the view that "once clients are wealthy enough certain consumer laws don't apply to them." After that meeting, Segarra turned to a fellow Fed regulator and said how surprised she was by that statement -- to which the regulator replied, "You didn't hear that."
This sort of thing occurred often enough -- Fed regulators denying what had been said in meetings, Fed managers asking her to alter minutes of meetings after the fact -- that Segarra decided she needed to record what actually had been said. So she went to the Spy Store and bought a tiny tape recorder, then began to record her meetings at Goldman Sachs, until she was fired.
(How Segarra got herself fired by the Fed is interesting. In 2012, Goldman was rebuked by a Delaware judge for its behavior during a corporate acquisition. Goldman had advised one energy company, El Paso Corp., as it sold itself to another energy company, Kinder Morgan, in which Goldman actually owned a $4 billion stake, and a Goldman banker had a big personal investment. The incident forced the Fed to ask Goldman to see its conflict of interest policy. It turned out that Goldman had no conflict of interest policy -- but when Segarra insisted on saying as much in her report, her bosses tried to get her to change her report. Under pressure, she finally agreed to change the language in her report, but she couldn't resist telling her boss that she wouldn't be changing her mind. Shortly after that encounter, she was fired.)
Read More: Michael Lewis on Deeb the Conquerer baring his soul before Mama
I don't want to spoil the revelations of "This American Life": It's far better to hear the actual sounds on the radio, as so much of the meaning of the piece is in the tones of the voices -- and, especially, in the breathtaking wussiness of the people at the Fed charged with regulating Goldman Sachs. But once you have listened to it -- as when you were faced with the newly unignorable truth of what actually happened to that NFL running back's fiancee in that elevator -- consider the following:
1. You sort of knew that the regulators were more or less controlled by the banks. Now you know.
2. The only reason you know is that one woman, Carmen Segarra, has been brave enough to fight the system. She has paid a great price to inform us all of the obvious. She has lost her job, undermined her career, and will no doubt also endure a lifetime of lawsuits and slander.
So what are you going to do about it? At this moment the Fed is probably telling itself that, like the financial crisis, this, too, will blow over. It shouldn't.
To contact the writer of this article: Michael Lewis at mlewis1@bloomberg.net.
To contact the editor responsible for this article: Marty Schenker at mschenker@bloomberg.net.
Michael Lewis
112 Sept 26, 2014 6:03 AM EDT
By Michael Lewis
a
A
(Updates fourth paragraph to include reference to ProPublica article containing Carmen Segarra's allegations.)
Probably most people would agree that the people paid by the U.S. government to regulate Wall Street have had their difficulties. Most people would probably also agree on two reasons those difficulties seem only to be growing: an ever-more complex financial system that regulators must have explained to them by the financiers who create it, and the ever-more common practice among regulators of leaving their government jobs for much higher paying jobs at the very banks they were once meant to regulate. Wall Street's regulators are people who are paid by Wall Street to accept Wall Street's explanations of itself, and who have little ability to defend themselves from those explanations.
Our financial regulatory system is obviously dysfunctional. But because the subject is so tedious, and the details so complicated, the public doesn't pay it much attention.
That may very well change today, for today -- Friday, Sept. 26 --- the radio program "This American Life" will air a jaw-dropping story about Wall Street regulation, and the public will have no trouble at all understanding it.
The reporter, Jake Bernstein, has obtained 46 hours of tape recordings, made secretly by a Federal Reserve employee, of conversations within the Fed, and between the Fed and Goldman Sachs. The Ray Rice video for the financial sector has arrived.
First, a bit of background -- which you might get equally well from today's broadcast as well as from this article by ProPublica. After the 2008 financial crisis, the New York Fed, now the chief U.S. bank regulator, commissioned a study of itself. This study, which the Fed also intended to keep to itself, set out to understand why the Fed hadn't spotted the insane and destructive behavior inside the big banks, and stopped it before it got out of control. The "discussion draft" of the Fed's internal study, led by a Columbia Business School professor and former banker named David Beim, was sent to the Fed on Aug. 18, 2009.
It's an extraordinary document. There is not space here to do it justice, but the gist is this: The Fed failed to regulate the banks because it did not encourage its employees to ask questions, to speak their minds or to point out problems.
Just the opposite: The Fed encourages its employees to keep their heads down, to obey their managers and to appease the banks. That is, bank regulators failed to do their jobs properly not because they lacked the tools but because they were discouraged from using them.
The report quotes Fed employees saying things like, "until I know what my boss thinks I don't want to tell you," and "no one feels individually accountable for financial crisis mistakes because management is through consensus." Beim was himself surprised that what he thought was going to be an investigation of financial failure was actually a story of cultural failure.
Read more: Michael Lewis on the occupational hazards of working on Wall Street
Any Fed manager who read the Beim report, and who wanted to fix his institution, or merely cover his ass, would instantly have set out to hire strong-willed, independent-minded people who were willing to speak their minds, and set them loose on our financial sector. The Fed does not appear to have done this, at least not intentionally. But in late 2011, as those managers staffed up to take on the greater bank regulatory role given to them by the Dodd-Frank legislation, they hired a bunch of new people and one of them was a strong-willed, independent-minded woman named Carmen Segarra.
I've never met Segarra, but she comes across on the broadcast as a likable combination of good-humored and principled. "This American Life" also interviewed people who had worked with her, before she arrived at the Fed, who describe her as smart and occasionally blunt, but never unprofessional. She is obviously bright and inquisitive: speaks four languages, holds degrees from Harvard, Cornell and Columbia. She is also obviously knowledgeable: Before going to work at the Fed, she worked directly, and successfully, for the legal and compliance departments of big banks. She went to work for the Fed after the financial crisis, she says, only because she thought she had the ability to help the Fed to fix the system.
In early 2012, Segarra was assigned to regulate Goldman Sachs, and so was installed inside Goldman. (The people who regulate banks for the Fed are physically stationed inside the banks.)
The job right from the start seems to have been different from what she had imagined: In meetings, Fed employees would defer to the Goldman people; if one of the Goldman people said something revealing or even alarming, the other Fed employees in the meeting would either ignore or downplay it. For instance, in one meeting a Goldman employee expressed the view that "once clients are wealthy enough certain consumer laws don't apply to them." After that meeting, Segarra turned to a fellow Fed regulator and said how surprised she was by that statement -- to which the regulator replied, "You didn't hear that."
This sort of thing occurred often enough -- Fed regulators denying what had been said in meetings, Fed managers asking her to alter minutes of meetings after the fact -- that Segarra decided she needed to record what actually had been said. So she went to the Spy Store and bought a tiny tape recorder, then began to record her meetings at Goldman Sachs, until she was fired.
(How Segarra got herself fired by the Fed is interesting. In 2012, Goldman was rebuked by a Delaware judge for its behavior during a corporate acquisition. Goldman had advised one energy company, El Paso Corp., as it sold itself to another energy company, Kinder Morgan, in which Goldman actually owned a $4 billion stake, and a Goldman banker had a big personal investment. The incident forced the Fed to ask Goldman to see its conflict of interest policy. It turned out that Goldman had no conflict of interest policy -- but when Segarra insisted on saying as much in her report, her bosses tried to get her to change her report. Under pressure, she finally agreed to change the language in her report, but she couldn't resist telling her boss that she wouldn't be changing her mind. Shortly after that encounter, she was fired.)
Read More: Michael Lewis on Deeb the Conquerer baring his soul before Mama
I don't want to spoil the revelations of "This American Life": It's far better to hear the actual sounds on the radio, as so much of the meaning of the piece is in the tones of the voices -- and, especially, in the breathtaking wussiness of the people at the Fed charged with regulating Goldman Sachs. But once you have listened to it -- as when you were faced with the newly unignorable truth of what actually happened to that NFL running back's fiancee in that elevator -- consider the following:
1. You sort of knew that the regulators were more or less controlled by the banks. Now you know.
2. The only reason you know is that one woman, Carmen Segarra, has been brave enough to fight the system. She has paid a great price to inform us all of the obvious. She has lost her job, undermined her career, and will no doubt also endure a lifetime of lawsuits and slander.
So what are you going to do about it? At this moment the Fed is probably telling itself that, like the financial crisis, this, too, will blow over. It shouldn't.
To contact the writer of this article: Michael Lewis at mlewis1@bloomberg.net.
To contact the editor responsible for this article: Marty Schenker at mschenker@bloomberg.net.
Monday, September 22, 2014
Profile
Diaries (list)
Sun Sep 21, 2014 at 08:40 AM PDT
Military missions don't creep anymore, they accelerate toward disaster
by Laurence LewisFollow for Daily Kos
150 Comments / 150 New
Shi'ite fighters, from the brigades of peace loyal to Shi'ite cleric Moqtada al-Sadr, who have joined the Iraqi army to fight against militants of the Islamic State, formerly known as the Islamic State of Iraq and the Levant (ISIL), take part in field tra
When he spoke to the nation about the upcoming military engagement with the terrorists who call themselves an Islamic State, President Obama was very clear:
As I have said before, these American forces will not have a combat mission –- we will not get dragged into another ground war in Iraq.
But he also played to those trembling in fear. His opening words:
My fellow Americans, tonight I want to speak to you about what the United States will do with our friends and allies to degrade and ultimately destroy the terrorist group known as ISIL.
Some immediately wondered how a large terrorist group that is deeply embedded in the local population of a large swath of two countries could be destroyed without a massive commitment of ground troops. Just five days later:
The nation's top military leader told Congress on Tuesday he would recommend that the United States consider deploying ground forces to Iraq if President Barack Obama's expanded air campaign to destroy Islamic extremists fails.
Army Gen. Martin Dempsey, the chairman of the Joint Chiefs of Staff, told a Senate panel that the goal for American advisers is to help Iraqi forces with planning, logistics and coordinating military efforts by coalition partners to take out members of the Islamic State group.
"To be clear, if we reach the point where I believe our advisers should accompany Iraqi troops on attacks against specific ISIL targets, I will recommend that to the president," Dempsey told the Senate Armed Services Committees, using an alternative name for the group.
Remember mission creep? Mission creep is quaint. As the New York Times editorialized:
Even though General Dempsey’s remarks were conditional, the Obama administration has turned on a dime in record time and opened the door to deeper, more costly American involvement even before the strategy is fully sketched out.
More beneath the fold.
And it gets worse:
The US defense secretary told senators on Tuesday that America is “at war” with the Islamic State (Isis), while the senior US military officer suggested US ground troops might directly join Iraqis in combat.
Want to know how to encourage crazed fanatics to join a terrorist group? Tell them that they're at war with the great American Satan. Enable them. Embolden them. The FBI seems to concur:
Support for Islamic State increased after U.S. airstrikes began in Iraq and the militant group may take more hostages to try to force concessions from Washington, the FBI director told Congress on Wednesday.
Islamic State is "committed to instilling fear and attracting recruits" and to drawing public attention, as shown through its use of social media and in videos it released of the beheadings of American journalists James Foley and Steven Sotloff, said FBI Director James Comey.
"ISIL's widespread use of social media and growing online support intensified following the commencement of U.S. airstrikes in Iraq," Comey, using an acronym for the group, said in prepared testimony for a congressional hearing on threats to the U.S. homeland.
An air war will make things worse. Let me repeat that: an air war will make things worse. Possibly including more hostages, more videos of vicious violence, and inevitably more Republican leaders wetting themselves in fear. But conveniently, there's that backup plan:
The U.S. Army's chief of staff spoke for the first time about ISIS in Iraq, warning Wednesday that American airstrikes will not be an "end-all solution" to the threat and that the military stands ready to respond by whatever means necessary. President Barack Obama has stressed that there will be no American combat troops in Iraq, but on Tuesday his top military adviser Gen. Martin Dempsey clouded the message by saying he might recommend just that if it becomes clear that current measures are not working.
Gen. Raymond T. Odierno, chief of staff of the U.S. Army, told reporters Wednesday that the military is “constantly conducting assessments” in order to best advise the president toward achieving his goal of destroying ISIS. When asked about Dempsey's remarks regarding U.S. ground troops in Iraq, he replied: “As we go down the road, if we think the way to do that might have to be the described then we will recommend that.”
A widespread terrorist organization that is deeply embedded in the local population of a large swath of two countries can't be destroyed from the air. Has a widespread terrorist organization ever been destroyed from the air? Has a war ever been won from the air? It defies common sense. But that's the plan. That and to arm and train local forces to do the dirty work on the ground. Which makes perfect sense, given that it was the catastrophic failure of those local forces after more than a decade of arming and training that led to the current crisis.
The terrorists will not be defeated by bombing from the air, and they will not be defeated by local forces. The goal of destroying them inevitably will come to be seen as having failed. The failed method of bombing from the air will enable and embolden the terrorists, increase their recruiting, and very possibly lead to more gruesome propaganda videos, which very certainly will lead the American public once again to succumb to fear. The cry will be that somebody must do something, and it will be obvious that the ongoing strategy has failed, but the lesson taken won't be that the entire premise was wrong, and that fighting an air and proxy war with a terrorist organization halfway around the world, that posed no threat to the American public, was a bad idea to begin with, the lesson will be taken that the war must be escalated. The generals already are planning for it. The right wing chickenhawks already are drooling over it. The traditional media will propagandize for it. And it would break with precedent if the American public didn't fall for it.
It gets worse. According to Defense Secretary Chuck Hagel:
Because ISIL operates freely across the Iraqi-Syrian border, and maintains a safe haven in Syria, our actions will not be restrained by a border in name only.
In name only. Funny thing about that, though: Syria, Russia and Iran don't consider Syria's borders to be in name only. Neither does international law. Nations don't have the right simply to declare established international borders non-existent. It seems it was only yesterday that American officials were trying to impress that same point about Russia's annexation and invasion of parts of Ukraine. It would seem that hypocrisy cuts both ways.
And it gets even worse:
Syrian opposition groups welcomed Obama's announcement and called for heavy weapons to fight the "terror" of Isis and Bashar al-Assad.
More mission acceleration. The Syrian opposition groups who are supposed to do the dirty work on the ground want the purpose of the war expanded, to include fighting the Syrian government itself. And who can blame them? Assad is a butcher, and foreign assistance against the terrorists who call themselves an Islamic State will enable Assad to refocus and redeploy some of his own forces against those same Syrian opposition groups on whom the Obama plan depends to fight the terrorists. The American war is supposed to be limited to fighting the terrorists, but the Syrian opposition forces are fighting both the terrorists and Assad. In fact, and apparently to the surprise of some American strategists, Syrian opposition forces have their own priorities:
As the United States begins to deepen ties with moderate Syrian rebels to combat the extremist group ISIS, also known as the Islamic State, a key component of its coalition appears to have struck a non-aggression pact with the group.
According to Agence France-Presse, ISIS and a number of moderate and hard-line rebel groups have agreed not to fight each other so that they can focus on taking down the regime of Syrian President Bashar Assad. Other sources say the signatories include a major U.S. ally linked to the Free Syrian Army. Moreover, the leader of the Free Syrian Army said Saturday that the group would not take part in U.S. plans for destroying the Islamic State until it got assurances on toppling Assad.
The deal between ISIS and the moderate Syrian groups casts doubt over President Barack Obama's freshly announced strategy to arm and train the groups against ISIS.
So, the plan is to bomb the terrorists, which almost certainly will only make things worse, to rely on local forces who are reportedly making a deal with the terrorists not to fight each other so they can all focus on fighting the Syrian government, and to keep in the back pocket the possibility of using ground troops. Just in case they become necessary. In the far off future somewhere. Just in case this plan of bombing, making things worse, and relying on local forces who have an entirely different agenda somehow doesn't work out.
And it gets even worse, because the history of sending arms to local forces has not been a pretty one. Many of the nearly quarter million small arms sent to Afghanistan are missing and unaccounted for. The terrorists in Syria and Iraq already have been winning battles by using captured American weapons, and now there will be even more American weapons for them to capture, from forces supposedly friendly to the U.S. but who are not themselves intent on fighting the same enemy the administration wants them to fight. Even the CIA thinks the idea of arming Syrian rebels is doomed to fail. More people will needlessly die, billions of more dollars will be wasted, and the bad guys inevitably will end up with more American-made weapons. And the neocons will demand an escalation. And the traditional media will back them. And the American generals already are contemplating American troops on the ground, if this impossible plan with impossible goals somehow proves unsuccessful.
When has a U.S. military incursion in the region ever proved successful? The Bush war in Iraq led directly to the current crisis. Thirteen years after it started, and despite two escalations from the Obama administration, the Bush war in Afghanistan remains a persistent failure. The effort in Syria was failed from the start, and with more money and more arms will only get worse. President Obama continues to choose his words very carefully, when discounting the possibility of using ground troops, but he still hasn't explained how a bombing campaign while relying on local forces to fight on the ground somehow will succeed where previous such efforts have failed. It will get worse. As will the politics. Blowback is coming. In the Middle East and in the United States.
Originally posted to Daily Kos on Sun Sep 21, 2014 at 08:40 AM PDT.
Also republished by Group W: Resisting War.
