A Senate hearing on the Federal Reserve’s oversight of banks turned into a roast of New York Federal Reserve president William Dudley, who tried to fend off complaints from several angry senators and counted not one supporter on his side.
The surprisingly fiery Friday hearing – entitled Improving Financial Institution Supervision: Examining and Addressing Regulatory Capture – was held to examine whether the Fed was overlooking conflicts of interest between its investigators and the banks they supervise.
The hearing was inspired by complaints from the whistleblower Carmen Segarra, a former Fed bank examiner who has claimed she was silenced by her bosses at the New York Fed during her supervision of Goldman Sachs. Senator Sherrod Brown, an Ohio Democrat, said during the hearing that Segarra had done “a public service in bringing [these problems] to light”.
Segarra’s complaints highlighted the revolving door problem at the Fed, whereby many examiners go to work for banks they once disciplined. That opens the door for Fed employees to leak information to banks. One such case, highlighted this week, caused Goldman Sachs to fire a young banker who had come from the Fed.
“The Fed is too cozy with the very banks where its oversight was needed,” Democratic Senator Joe Manchin of West Virginia said during the hearing.
“It’s not surprising that Wall Street always manages to stay one step ahead of the sheriff,” Brown said. Brown said the Fed’s problems showed that “the agencies handcuff themselves or public servants curry favor with the banks they supervise”.
It was the second hearing in as many days to slam the Fed, putting pressure on the central bank to examine its oversight of the US financial system. A Senate investigation found on Thursday that the Fed put the financial system at risk by allowing banks to get away with gaining an unfair advantage in the commodities markets.
Senator Elizabeth Warren, a Massachusetts Democrat, reiterated that point to Dudley: “Until you’re willing to take meaningful action, our financial system and our whole economy remain at risk.”
Dudley was a target for several senators, including Democrat Jeff Merkley of Oregon, who complained that the nation’s central bank had gone too easy on wrongdoers in banking. Brown expressed concern about “Americans who lost their jobs, who lost their pensions, who lost their savings” because of wrongdoing at banks.
Dudley found no allies. The senators grilled him for not spotting failures ranging from the Libor rate-fixing scandal to the London Whale mess at JP Morgan. Dudley countered that the London Whale problems originated mostly out of the firm’s London office. However, a Senate investigation last year drew testimony from American bank examiners at the Office of the Comptroller of the Currency who said that JP Morgan had defied their attempts to gain understanding of the bank’s workings.
Dudley, a former Goldman Sachs economist, took over leadership of the New York Fed in 2009 when his predecessor, Tim Geithner, became US treasury secretary. His Goldman Sachs experience drew some grumbling from Brown, who said of the commodities hearing the day before: “Goldman Sachs was defended by some of my colleagues, as they always are around here.”
Warren landed the sharpest punches against Dudley, interrupting him in hopes of forcing him to acknowledge the Fed had failed, as she saw it, in supervising banks.
Warren also pressed the issue on Libor, an international interest rate that according to regulators was manipulated by traders for years. “Do you wish you had looked at it earlier, investigated it before they had cheated people for years?” Warren asked Dudley.
Warren, more than the other senators, asked Dudley to account for his behavior as leader of the New York Fed.
“I think there’s a terrible cultural problem at banks,” Warren said, “but given the long list of supervisory failures at the New York Fed, both before and during your tenure, would you say that the Fed has its own cultural problems?”
Dudley objected that the Fed had not failed, but Warren disagreed.
“Change has to come from the top and it has to go all the way through the institution,” Warren said, following up with the pointed response that “either you need to fix it, Mr Dudley, or we need to get someone who will”.
Dudley, trained as an economist rather than a bank regulator, fended off the abuse by objecting: “I’m more of a fire warden, not a cop on the beat.” He also countered the senators’ points by saying the bank commissioned a 2009 examination of its own supervisory policies and has helped jail executives at BNP Paribas and Credit Suisse.
This article was written by Heidi Moore in New York, for theguardian.com on Friday 21st November 2014 20.18 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010