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Gov't Investigates Regulatory Capture of Fed

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Gov't Investigates Regulatory Capture of Fed

regulatory-captureCongress's investigative agency, the General Accountability Office (GAO,) has announced that it is preparing for an investigation of the Federal Reserve regarding concerns that is a victim of "regulatory capture" -- being controlled by the "too big to fail" Wall St. banks (notably, Goldman Sachs.)

Special focus will be directed at the New York Federal Reserve, which is responsible for regulating those giant New York investment banks, but whose roster is filled with former Goldman Sachs executives and employees.

GAO spokesperson Charles Young told Bloomberg “We’ll be examining regulatory capture at the Fed, but I can’t speak to exactly what was in the letter.” He indicated that the probe may or may not expand beyond the New York Federal Reserve.

The investigation was requested in writing back in October by Rep. Maxine Waters, ranking Democrat on the House Financial Services Committee, and Rep. Al Green of the HFSC's Subcommittee on Oversight and Investigations. According to Reuters, they requested the GAO examine six areas, including the independence of regulators, their ability to escalate concerns, and incentives they face to take jobs at the banks they supervise.

The president of the New York Fed, William Dudley, worked at Goldman Sachs for ten years as chief economist, managing director, and partner. This is just one of many examples of the "revolving door" between Goldman and the NY Fed. Critics of the Fed say that the "cozy relationship" it has with the nation's largest banks was a significant factor in bringing about the 2008 financial crisis.

Congress's Watchdog


While neither Congress nor the Executive Branch can exercise direct control over the Federal Reserve, as America's central bank the Fed derives its authority from Congress. This makes the Fed subject to Congressional oversight. This oversight is performed by "Congress's watchdog," the GAO. The GAO is an independent, nonpartisan agency that investigates and audits government expenditures. Congress can also direct the GAO to investigate "allegations of illegal and improper activities."

Congress has the power to alter the Fed's mandate through legislation. If Congress finds that control of the Fed has been taken over by the entities it is supposed to regulate, it may act on its own to rectify the situation. Despite years of allegations, this is the first time the GAO has examined the Fed for signs of regulatory capture.

"Government Sachs"

Goldman Sachs has a long history of "swapping bodies" with the New York Federal Reserve, which is responsible for regulating the bank. Goldman employees quit or retire, and go to work for the Fed, the Securities Exchange Commission (SEC,) or the Treasury Department. Some end up as Presidential advisors. Conversely, federal employees from the above agencies charged with regulating Goldman Sachs (among other TBTF banks) often leave to go work for those very same banks (for a hefty salary.)

This culture of regulators acquiescing to the desires of the big banks in hopes of landing a cushy bank job later was explosively exposed when New York Fed examiner Carmen Segarra was forced out of her job for refusing to cover up wrongdoing at Goldman Sachs. The pressure to "play ball" and not upset Goldman Sachs became so intense, that she started recording her meetings with colleagues and supervisors. She released 46 hours of tapes revealing a culture at the NY fed that emphasized rolling over for Goldman Sachs and other Wall St. banks, ignoring wrongdoing in hopes of being rewarded later.

She was fired a week after refusing her supervisor's demands to falsify a conflict of interest report on Goldman Sachs. Her lawsuit for wrongful termination was thrown out by the courts.

Still, the Segarra tapes shone a bright light on the culture of the NY Fed's "embedded regulators." These examiners are assigned a desk in departments engaging in high-risk operations at the bank they are monitoring, and spend every working day shoulder to shoulder with the employees.  This makes them less likely to report a "friend" for illegal or dangerous financial activities. Robert Hockett, a law professor at Cornell University, called this "cognitive capture," a type of Stockholm Syndrome. One Fed supervisor, who wished to remain anonymous, said he could see it setting in after only three weeks.

In response to pressure from Congress and the press, the New York Fed has begun a process of bringing Fed regulators back into the main office, instead of being permanently assigned to the banks they are assigned to. It is hoped that this will lessen the chances of regulatory capture.

On its part, Goldman Sachs implemented a conflict of interest policy to rectify some of the problems that Segarra had discovered.

They're Everywhere

This 2011 Venn diagram from gives a partial view of Goldman Sach's infiltration, of not only the US regulatory structure, but the highest levels of government as well.

GSVenn.001Not mentioned in the above graphic are:

  • Mark Carney: (Managing Director, Investment Banking; Executive Director, Emerging Debt Capital Markets) Governor of TWO major central banks: the Bank of Canada, and the Bank of England.
  • Mario Draghi: (Vice chairman and managing director of Goldman Sachs International) Governor of the Bank of Italy, President of the European Central Bank.
  • Joshua Bolten: (Executive Director for Legal and Government Affairs at Goldman's London office.) Director of the Office of Management and Budget, White House Chief of Staff for George W Bush. Advocated naming Goldman CEO Henry Paulson as Secretary of the Treasury.
  • Stephen Friedman: (Chairman of the Board, Goldman Sachs.) Chairman of the Board, New York Federal Reserve.
  • Robert Steele: (Vice Chairman of Goldman Sachs.) Under Secretary of Domestic Finance, Treasury Department under Henry Paulson.
  • Romano Prodi (Senior Advisor of Goldman Sachs International in Italy.) Twice Prime Minister of Italy, President of the European Commission. Charges of conflict of interest over Goldman Sachs' involvement in Prodi's work regarding the privatizing of government assets were dropped when Prodi became Prime Minister.

To this partial list, we can add the appointment of three ex-Goldman executives as Federal Reserve regional presidents in less than a year. In July, Goldman Sachs trustee and chairman of the Philadelphia Fed Board of Directors Patrick Harker decided to change chairs and be the new Philly Fed president.  The next month, former Goldman Sachs Vice Chairman Robert Kaplan pulled a "Cheney." Kaplan was on the committee to find a new Dallas Fed president, and decided the best candidate was himself.

In November, the Minneapolis Fed tapped Neel Kashkari as their new president. His career at Goldman started with an internship while getting his MBA at Wharton. Afterwards, he was assigned to cover technology investment opportunities in Silicon Valley.

In 2008, Kashkari was chosen by Secretary of the Treasury and ex-Goldman Sachs CEO Hank Paulson to head the Troubled Asset Relief Program (TARP.) This was the $432 billion bailout of Wall St. banks where they were first described as "too big to fail." Kashkari was the "public face" for the TARP program, and one of Paulson's most trusted advisors.

And Then There Were Four

These three Goldman alumi join Dudley at the NY Fed to control one-third of all regional Federal Reserve districts. How did former Goldman Sachs executives gain the presidency of four regional Fed banks?

The Fed regional presidents are chosen by each banks’ nine-member boards of directors. Their decisions are approved by the Federal Reserve Board of Governors in Washington, DC. Three of the nine directors are chosen by the member banks of the region, three are chosen by the Federal Reserve Board of Governors, and three are chosen to "represent the public... with due but not exclusive consideration to the interests of agriculture, commerce, industry, services, labor, and consumers."  Therefore, three at most could have non-banking or non-corporate backgrounds.

To be fair, Goldman Sachs will not be the only "systemically important" bank that will come under the GAO's eye. In 2012, JP Morgan's Chief Investment Office lost $5.4 billion on bad beds in credit default swaps (CDSs) in the "London Whale" scandal. There were no Fed examiners assigned to oversee the department, as JP Morgan CEO Jamie Dimon insisted there were no risky trades being made.

Goldman Sachs: "You've Got It All Wrong!"

Goldman Sachs responds to charges of regulatory capture at the Fed, that, as one of the world's most powerful banks, it has some of the brightest minds in finance working there. It is only natural that some of them, in subsequent careers, end up in government. The bank notes that it has been in Fortune's Best 100 Places to Work since the list began. It is only natural for former Fed or Treasury employees come to work at Goldman Sachs, who desires them for their expertise in compliance matters.

Will Anything Come of This Investigation?

It is unlikely that the GAO will conclude its investigation before the Presidential election, as the probe will doubtlessly be long and thorough.  Senator Elizabeth Warren, a vocal critic of Wall St. and bank deregulation, will surely hold hearings on the GAO's findings, but any concrete results from this investigation are far from certain.


The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product

About the Author

Everett Millman

Steven Cochran

Precious Metals Market Analyst
BS University of South Florida (2002)

A published writer, Steven's coverage of precious metals goes beyond the daily news to explain how ancillary factors affect the market.

Steven specializes in market analysis with an emphasis on stocks, corporate bonds, and government debt. He writes a monthly review of the precious metals markets for

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