Cozy relationship between Fed and big banks draws scrutiny

GWEN IFILL:

Finally: new questions about how the Federal Reserve supervises big banks.

ProPublica and public radio's "This American Life" have produced reports focusing on the role of a former supervisor from the New York Fed, Carmen Segarra, who was monitoring Goldman Sachs. Segarra was placed inside the bank, as required by law, but she also made secret audio recordings that seemed to show other Fed officials were going too soft on Goldman, including over a deal one regulator called legal, but shady.

Segarra was fired a few months later. The Fed has denied any connection, but said it will conduct its own review.

Those issues were the subject of a recent Senate hearing with New York Fed President William Dudley.

Jake Bernstein helped break the initial story for ProPublica.

Judy spoke with him recently.

JUDY WOODRUFF:

Jake Bernstein, welcome.

So, tell us more about what has sparked interest in the Fed all over again and how it does its job.

JAKE BERNSTEIN, ProPublica:

Sure.

The genesis of this is really a bank examiner who was at the Fed in 2011 and 2012. She was fired after about seven months on the job. But before she was fired, she secretly recorded hours, approximately 46 hours, of meetings of her on the job with her colleagues and at the bank that she was supervising, which happened to be Goldman Sachs.

We got access to those recordings and have written some stories based on them.

JUDY WOODRUFF:

And how does the Fed explain it? As we mentioned before, they seemed to suggest the Fed going soft on Goldman Sachs. How — is that a fair interpretation? And how does the Fed explain it?

JAKE BERNSTEIN:

Well, what is interesting is that that is not our interpretation, or simply our interpretation, because, in 2009, the Fed brought in an outside consultant to do a top-to-bottom review of their supervisory practices involving big banks.

And this outside consultant found that the New York Fed was too deferential to the banks it was supervising and that there was a climate of fear. I mean, he basically said that the culture of the New York Fed was the biggest obstacle to completing its mission.

And so we sort of used that as a baseline to then look at what these recordings showed. And what they seemed to demonstrate was that not a lot had changed since that consultant's report in 2009.

JUDY WOODRUFF:

And how does the Fed defend its actions?

JAKE BERNSTEIN:

The president of the New York Fed, Bill Dudley, said in a Senate hearing, you should judge us on the fact that the banking system is stronger since the financial crisis, that there hasn't been another crisis since 2008, and that we are — that is evidence that we are doing a better job.

But there have been a number of incidents, not just our reporting, but other people's reporting and a Senate report, that have pointed to problems still existing.

JUDY WOODRUFF:

Now, and, as we also mentioned, we know now the Fed has announced it's conducting its own internal investigation of how it — how it deals with the big banks, how its own examiners deal.

What is the genesis of that? What's expected to come out of that?

JAKE BERNSTEIN:

That's a very good question.

They will not say what the genesis of it is, but it seems clear that it is the result of these media reports, ours in particular, that sort of prompted this. There are going to be two investigations, one internal by the Federal Reserve Board in Washington, D.C., and one by the inspector general. They will be parallel, but overlapping.

And they're going to be looking at the Fed's — the regional banks, not just the New York Fed, but the other regional bank — Fed banks that supervisor big banks, Richmond Fed, the San Francisco Fed, some of the others, and they're going to be looking at how they do their supervision of these big banks.

And particularly they're going to be looking at whether, when examiners find things, they are able to communicate that to the higher-ups, and the higher-ups actually act on it.

JUDY WOODRUFF:

So, does it appear, Jake Bernstein, that the Fed may be headed toward some reforms in the way its bank examiners operate and how they view their conflicts of — potential conflicts of interest?

JAKE BERNSTEIN:

There seems to be gathering steam in that direction.

I mean, only time will only tell if it actually happens, but there has been a bill introduced in the Senate that would make the president of the New York Fed a nominated position by the president and confirmed by the Senate. That seems to have a little bit of energy behind it. And then you have these two investigations.

So I think that there is sort of a gathering movement for it, you know, recognizing that there's the need for some reform, and that reform could very well happen.

JUDY WOODRUFF:

And — and what about the role the U.S. Congress is playing in all of this?

JAKE BERNSTEIN:

Yes.

I mean, I think that the Federal Reserve Board is one of those things that unites the left and the right. They sort of approach it from different places. You know, the Republicans are a little bit more concerned about monetary policy. The Democrats are a little bit more concerned about supervision.

But I think they're both concerned about transparency and whether there is sufficient oversight over the Fed's operations. And I think there could be a meeting of the mind in the next Congress about that.

JUDY WOODRUFF:

Jake Bernstein, who did this reporting for ProPublica, we thank you.

JAKE BERNSTEIN:

No, thank you.