The back story of the most recent Wall Street scandal is as follows: In October 2011, the Federal Reserve Bank of New York hired a senior examiner, namely Carmen M. Segarra, to review the Legal and Compliance Division of Goldman Sachs.
As her audit proceeded, Segarra concluded that Goldman Sachs had failed to address conflicts of interest when advising clients. The patchwork of policies that Goldman Sachs allegedly had in place was pointless and fell short of the Fed’s requirements.
Moreover, Segarra later found that Goldman Sachs fabricated information about performing due diligence on a number of transactions.
In one of them, that involved Banco Santander SA (SAN), Segarra claimed that not only had Goldman Sachs not performed its due diligence, but went as far as to misrepresent the New York Fed’s approval of that transaction to the parties.
Goldman Above the Law
When the examiners asked in November 2011 to see the conflict-of-interest policy, they were told one didn’t exist, probably more than one document as there is no one policy per se, according to the detailed minutes Segarra kept during the meetings.
And how could it be otherwise? Since it is a well known fact that Goldman Sachs is probably the only institution that takes on advising clients on both sides of several multibillion-dollar deals.
Now, this is similar to a lawyer representing both sides in a lawsuit. I know you think this cannot happen and it doesn’t. But financial institutions, such as Goldman Sachs, JP Morgan, and other Wall Street brands, have been bending the definition of impossible, fair and humane to the breaking point for a very long time.
According to the lawsuit, and following Segarra’s initial findings, the New York Feds senior supervising officer at Goldman, Michael Silva, called an impromptu session with Fed staffers, including Segarra.
Silva said he was worried that Goldman was not managing conflicts well and that if the extent of the problem became public, clients might abandon the firm and cause serious financial damage.
In short, Silva was saying that illegal activity is okay as long as it is kept hidden from the public. But for whose benefit?
Among the documents provided to Segarra was a memo about how Goldman employees should handle potential conflict of interest problems. You can read the whole memo here, but allow me to highlight the following abstract:
Emails or other written communications should not be used for vetting conflicts because it is unrealistic to expect that all relevant information will be properly captured in written communications, particularly email, and they may create a misleading record of our thought processes and deliberations.
This statement is so outrageous that I almost pissed myself laughing. As if verbal communications are more reliable and a better medium for recording thought processes and deliberations. Nonsense.
According to the lawsuit, Segarra’s finding left no other choice to the New York Fed’s Legal and Compliance risk team, but to approve downgrading Goldman’s annual rating pertaining to policies and procedures.
Pressure To Change Findings
That finding could have led to closer scrutiny of Goldman Sachs’ practices by regulators and changes may have been required… So in turn the New York Fed was left with no other choice but to ask her to falsify her findings and change her report.
When she refused, they tried to shove her off to the side to stop her from finalising her report, so they can issue their own, more favorable conclusions to Goldman Sachs.
Our hero though pushed back in writing. Three days later she was fired.
On October 10, 2013, plaintiff Carmen M. Segarra filed a lawsuit alleging violations of 12 US code section 1831 and other laws â€œprohibiting obstruction and interference with a bank examiners examination and retaliation for her preliminary examination findings,â€ against the Â Federal Reserve Bank of New York, Michael Silva, Michael Koh, and Jonathon Kim.
On October 11, 2013 the defendant FED directly mailed a letter to the Judge, asking that the complaint be withheld from the public. The judge initially granted the request, and ordered that the complaint was not to be available electronically to the public until after a hearing.
The hearing regarding the request to seal certain matters was set for October 15, 2013, when the judge DENIED the motion to seal. The complaint is available for viewing here.
Hopefully, Carmen M. Segarra will endure pressures and threats and she will not settle confidentially before the discovery phase.
Goldman Ties with FED
There have been loads of discussions about the Federal Reserve since the global credit crisis of 2007. Who is running it? Where does it get its authority from? Why have they borrowed $1.2 trillion in public money to the same people that gambled and lost the money in the first place?
Goldman is known for having close ties with the New York Fed, which is its primary regulator, but how close these ties are is still unknown to the public.
According to Wikipedia, the current president of the New York Fed, William Dudley, is a former Goldman partner. One of his New York Fed predecessors, E. Gerald Corrigan, is currently a top executive at Goldman. Finally, at the time of Segarraâ€™s firing a former chairman of the New York Fed, Stephen Friedman, was head of the risk committee for Goldmanâ€™s board of directors.
Notes on Goldman Sachs
Let’s remember that Goldman Sachs was one of the heaviest users of the Fed’s loan facilities, taking out numerous loans from March 18, 2008 â€“ April 22, 2009.
While CEO of Goldman Sachs Group in 2007, Blankfein earned a total compensation of $68millions, including a cash bonus of $27 millions. His total 2012 pay was $9 millions more than in 2011 and the highest since before the financial crisis.
For 2012, the Goldman Sachs CEO earned $26 million, making him the best-paid bank chief in North America – a title that he also held in 2010 before losing it to Jamie Dimon of JPMorgan Chase the following year.