There's a startling moment in the recently released audio recordings of Goldman Sachs bankers talking to their regulators at the Federal Reserve Bank of New York. But it's not shocking for the reasons you might assume.
The tapes -- secretly recorded by then-bank examiner Carmen Segarra, whom the New York Fed employed for seven months in late 2011 and early 2012 to keep tabs on Goldman -- don't capture any craven wrongdoing by the bank. (Goldman Sachs responded with a short, dismissive statement last week when the tapes were made public.) Instead, it's the New York Fed that comes off looking terrible -- deferential and ineffectual, and apparently concerned above all with accommodating the banks it was supposed to regulate. It's a perfect picture of a culture structured by regulatory capture.
For instance: ProPublica reporter Jake Bernstein describes a meeting where a senior Goldman compliance executive "mentioned that Goldman's view was that once clients were wealthy enough, certain consumer laws didn't apply to them."
That sounds cavalier, and Segarra was "shocked" to hear it. She wanted to ask the executive what he had meant. Her colleagues at the New York Fed, however, told Segarra she didn't hear what she heard -- and even if she had, the executive didn't really mean it. Asking for a follow-up explanation was never raised as a possibility.
This immediate instinct to shut down any questions about Goldman's behavior is not the reaction you want from a regulator. And it's made all the worse because Segarra's question in this case was actually quite benign. There's a very easy explanation for that executive's comment: It's true.
Wealthy individuals can qualify with the Securities and Exchange Commission as accredited investors. This means they can invest in more things and have fewer protections afforded to them.
In this case, the SEC defines wealthy as an individual or married couple with a net worth greater than $1 million, excluding the value of their first home. Alternatively, an investor can qualify if they’ve made more than $200,000 in the each of the past two years, or over $300,000 as a married couple over the same time frame. Trusts with more than $5 million in assets can also qualify. Becoming an accredited investor allows you to buy a broader range of financial products, and crucially in this context, it allows banks to sell you a far broader range of financial products with fewer investor protections built in. For instance, banks can sell accredited investors unregistered offerings, which allow companies to only disclose information the company decides to release. Registered offerings, on the other hand, have a long list of information that companies are required to disclose. Non-accredited investors can buy unregistered offerings, but only if the same information is disclosed as would be in a registered offering. Accredited investors can also participate in private offerings without any limitations. Only 35 non-accredited investors can participate in a private placement, and they must be considered “sophisticated.”
That's a slightly more precise version of what the Goldman executive said, but people practicing in an expert and jargon-filled field often talk in shorthand. Both the New York Fed and Goldman are familiar with accredited investor rules (or they certainly should be, at any rate). It should have been easy to clarify if this was in fact what the executive was talking about, but we can’t know for certain if the explanation is this benign, because the Fed never asked. So if there was the possibility of an innocent explanation like this, why were Segarra's colleagues so loath to ask questions about what that executive said?
If the Fed is too afraid to ask Goldman Sachs questions when the bank could well be in the right, how can it be expected to ask questions when the answer might point to even a hint of wrongdoing? That would be awkward. And the avoidance of awkwardness -- no matter the consequence for regulation -- seems to be a very high priority for the New York Fed.
(For much more about Goldman Sachs, the New York Fed and Segarra's secret tapes, check out the excellent story by ProPublica and "This American Life.")