JESSICA DESVARIEUX, TRNN PRODUCER: Welcome to The Real News Network. I’m Jessica Desvarieux in Baltimore. And welcome to part two of our interview with Bill Black.
Bill Black is an associate professor of economics and law at the University of Missouri-Kansas City, and he’s a regular contributor to The Real News.
Thanks for joining us again, Bill.
BILL BLACK, ASSOC. PROF. ECONOMICS AND LAW, UMKC: Thank you.
DESVARIEUX: So, Bill, let’s pick it up from where we left off. Can you please tell us about the New York Fed? What is their role? And how do you assess their performance in recent years?
BLACK: Well, the New York Fed is of course supposed to regulate most of the largest bank holding companies in America, and it has been a complete catastrophic failure. It has zero success stories in dealing with the upcoming crisis. And, of course, it was run by Timothy Geithner during all of the key years. And I’ve gone back through his speeches, all of his speeches in that capacity as president of the Federal Reserve Bank of New York, and he raised absolutely no warnings about the coming crisis and took absolutely no effective actions to deal with it.
In addition, viewers can look at the Financial Crisis Inquiry Commission report, which they can get for free, and they can look at the broader materials. And one of them is a white paper by the former top regulator/supervisor at the Fed, whose name is Richard Spillenkothen. And Spillenkothen says expressly that the conflict of interest in the regional Feds, which are owned by the banks, that the examiners they employ are supposed to regulate and which are run by boards of directors, which are dominated by the banks that they’re supposed to regulate, well, Spillenkothen says this doesn’t work in practice, that consistently the supervisory response in these regional banks has been far too weak. And that’s quite a powerful statement, because the supervisory response of the Washington apparatus of the board of governors of the Federal Reserve was incredibly weak under Greenspan and Bernanke, which is what it’s been under for 25 years. And if the regional banks were noticeably worse than the national headquarters was, that is pretty much the definition of pathetic.
DESVARIEUX: Okay. Well, Bill, I want to go back to the Segarra case and get your opinion, considering you were a white-collar criminologist and a former financial regulator. In your experience studying financial crimes, what is the role of whistleblowers?
BLACK: Well, first, the key is the role of conflicts of interest. So conflicts of interest are well-known as being one of the most severe forms of risk that you can have. It’s one of the clear warning signs that everybody agrees about potential bank losses and failures. So we really want to encourage people when they spot weaknesses in the form of conflicts of interest to bring that to the attention forcefully of the institution. And one of the most important ways you get the attention of a bank’s senior management and board of directors when you do a report of examination is to criticize with specific facts a weakness like conflict of interest and then to downgrade their rating. And if you downgrade their rating, this can have really quite significant effects on an entity like Goldman Sachs.
So not only did Segarra find this problem, but she and her examination associates, the people who were closest to the facts, according to the news reports, believe that it warranted specific, strong criticisms of Goldman Sachs and strong consideration of a rating downgrade. Now, this is not the rating of Standard & Poor’s and Moody’s; this is the CAMELS rating, which is an acronym for things like capital, assets, management–in other [incompr.] that government examiners use on the quality of banks.
And the response to finding these problems should be very disturbing–this is the response by her superiors–because the superiors didn’t–according to the longer article, again, in Politico and The Washington Post–did not engage in a process of let’s look at the specific documents, let’s look at the response of management; is the critique that you’re proposing in the examination report correct? They simply said, we demand that you take the criticism out. And being a professional, she refused to do that. And then, instead of saying, oh, well, you know, she obviously believes very strongly in this view, maybe we should look at the facts in detail, they fired her and they fired her in an incredibly quick fashion. We’re talking about within days. And according to the press accounts, it was one of these nasty firings where they, you know, have a guard escort her out of the building like she’s, you know, some kind of criminal and such.
So this is the kind of thing that sent shockwaves through an examination core that I’d best not criticize these systemically dangerous institutions, because not only will my bosses not back me up, well, they’ll actually stab me in the back and fire me and, you know, treat me like a criminal, kick me out in a way that’ll be very difficult to get a job ever in the future in finance. So this is a really scary response that you would only do if you, for example, believe that the examiner or supervisor was, you know, bribed, basically, by a rival and was going after Goldman Sachs for some personal vendetta or because they were in the pay of a rival bank. And, of course, there are no such allegations in this case. So this [incompr.] response to an examiner.
So she wasn’t really a whistleblower, of course. She was doing this as part of her normal function. It’s her job to write up an examination report that has these kinds of warnings. She’s a whistleblower only in the sense that once they fired her, she [incompr.] lying down and filed a civil suit saying that you have fired me unlawfully. And the effort of the Federal Reserve Bank of New York to keep such a case secret and sealed is a further demonstration of why it is [incompr.] that the Congress immediately remove the examiners and supervisors from being employees of the banks that are owned and controlled by the banks that the examiners are supposed to regulate, which is a ludicrous conflict of interest. Indeed, I’ll tell you what’s really bad news about [inaud.] at the Fed you do not have a major revolt going on that says, this is an outrage, we need to get rid of this conflict of interest, we need to get the Federal Reserve banks out of the examination and supervision business and put that in the governmental hands.
DESVARIEUX: Now this case is out in the open, and we’ll certainly keep our eyes on it.
Thank you so much for joining us, Bill.
BLACK: Thank you.
DESVARIEUX: Thank you for joining us on The Real News Network.
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