A confidential report and a fired examiner’s hidden recorder penetrate the cloistered world of Wall Street’s top regulator—and its history of deference to banks
Barely a year removed from the devastation of the 2008 financial crisis, the president of the Federal Reserve Bank of New York faced a crossroads. Congress had set its sights on reform. The biggest banks in the nation had shown that their failure could threaten the entire financial system. Lawmakers wanted new safeguards.
The Federal Reserve, and, by dint of its location off Wall Street, the New York Fed, was the logical choice to head the effort. Except it had failed miserably in catching the meltdown.
New York Fed President William Dudley had to answer two questions quickly: Why had his institution blown it, and how could it do better? So he called in an outsider, a Columbia University finance professor named David Beim, and granted him unlimited access to investigate. In exchange, the results would remain secret.
After interviews with dozens of New York Fed employees, Beim learned something that surprised even him. The most daunting obstacle the New York Fed faced in overseeing the nation's biggest financial institutions was its own culture. The New York Fed had become too risk-averse and deferential to the banks it supervised. Its examiners feared contradicting bosses, who too often forced their findings into an institutional consensus that watered down much of what they did.
The report didn't only highlight problems. Beim provided a path forward. He urged the New York Fed to hire expert examiners who were unafraid to speak up and then encourage them to do so. It was essential, he said, to preventing the next crisis.
A year later, Congress gave the Federal Reserve even more oversight authority. And the New York Fed started hiring specialized examiners to station inside the too-big-to fail institutions, those that posed the most risk to the financial system.
One of the expert examiners it chose was Carmen Segarra.
Listen to excerpts from the recordings Carmen Segarra captured at the Federal Reserve Bank of New York.
Segarra appeared to be exactly what Beim ordered. Passionate and direct, schooled in the Ivy League and at the Sorbonne, she was a lawyer with more than 13 years of experience in compliance – the specialty of helping banks satisfy rules and regulations. The New York Fed placed her inside one of the biggest and, at the time, most controversial banks in the country, Goldman Sachs.
As ProPublica reported last year, Segarra sued the New York Fed and her bosses, claiming she was retaliated against for refusing to back down from a negative finding about Goldman Sachs. A judge threw out the case this year without ruling on the merits, saying the facts didn't fit the statute under which she sued.
At the bottom of a document filed in the case, however, her lawyer disclosed a stunning fact: Segarra had made a series of audio recordings while at the New York Fed. Worried about what she was witnessing, Segarra wanted a record in case events were disputed. So she had purchased a tiny recorder at the Spy Store and began capturing what took place at Goldman and with her bosses.
Segarra ultimately recorded about 46 hours of meetings and conversations with her colleagues. Many of these events document key moments leading to her firing. But against the backdrop of the Beim report, they also offer an intimate study of the New York Fed's culture at a pivotal moment in its effort to become a more forceful financial supervisor. Fed deliberations, confidential by regulation, rarely become public.
The recordings make clear that some of the cultural obstacles Beim outlined in his report persisted almost three years after he handed his report to Dudley. They portray a New York Fed that is at times reluctant to push hard against Goldman and struggling to define its authority while integrating Segarra and a new corps of expert examiners into a reorganized supervisory scheme.
Segarra became a polarizing personality inside the New York Fed — and a problem for her bosses — in part because she was too outspoken and direct about the issues she saw at both Goldman and the Fed. Some colleagues found her abrasive and complained. Her unwillingness to conform set her on a collision course with higher-ups at the New York Fed and, ultimately, led to her undoing.
In a tense, 40-minute meeting recorded the week before she was fired, Segarra's boss repeatedly tries to persuade her to change her conclusion that Goldman was missing a policy to handle conflicts of interest. Segarra offered to review her evidence with higher-ups and told her boss she would accept being overruled once her findings were submitted. It wasn't enough.
"Why do you have to say there's no policy?" her boss said near the end of the grueling session.
"Professionally," Segarra responded, "I cannot agree."
The New York Fed disputes Segarra's claim that she was fired in retaliation.
"The decision to terminate Ms. Segarra's employment with the New York Fed was based entirely on performance grounds, not because she raised concerns as a member of any examination team about any institution," it said in a two-page statement responding to an extensive list of questions from ProPublica and This American Life.
The statement also defends the bank's record as regulator, saying it has taken steps to incorporate Beim's recommendations and "provides multiple venues and layers of recourse to help ensure that its employees freely express their views and concerns."
"The New York Fed," the statement says, "categorically rejects the allegations being made about the integrity of its supervision of financial institutions."
While the PM has announced ‘Make in India’ with great fanfare, innovative companies like Uber and Amazon are getting a taste of laws made in India
This is not what prime minister (PM) Narendra Modi had in mind when he launched his high-profile ‘Make in India’ programme on 25th September. Yet, ironically, two multinational companies, Uber and Amazon, seem to have fallen prey to the large swathe of ‘made in India’ regulations that make it very difficult to do business in India.
Uber and Amazon are considered two of the most innovative companies in the world, so it would have been a big surprise if they had not fallen foul of India’s notoriously turgid bureaucracy.
Not only has the Reserve Bank of India (RBI) taken objections to Uber’s payment model and the Karnataka tax authorities with Amazon’s e-commerce model, but, typically, the Enforcement Directorate is also investigating Amazon.
The Department of Revenue Intelligence may also jump in to raise issues of violation of forex laws. That we, the people, find their services excellent, efficient and cost-effective, is of no interest to the rule-makers nor push them to find a quick solution. That is how the ‘Made in India’ legal and enforcement system works.
Uber is a global tax cab company. In order to hire a car, you need to download a phone application, supply credit card details and call a car. Once your ride is booked, the hi-tech system allows you to track the car to your pick-up point. At the end of the journey, your credit card is automatically debited and the invoice mailed to you.
Uber’s clean and easy transactions and aggressive pricing (almost on par with auto-rickshaws for an air-conditioned sedan ride) was growing fast enough to unnerve the competition. They complained to RBI which immediately said that the absence of a two-stage authentication on the credit card transaction and use of a foreign payment gateway violated Indian rules.
In Amazon’s case, the tax authorities in India decided that, since Amazon pre-orders certain popular products and stocks them in its warehouses, it is not an electronic marketplace but a reseller and falls foul of sales tax.
To expect Indian regulators to anticipate and permit an innovative business model is to be out of touch with reality. The two MNCs would have been better advised by their lawyers and consultants, based on the experience of a series of technology companies in the past five years—that they should be prepared for draconian coercive action, including raids and worse, which could shut down their business in India.
Commentators, who argue that India will send the wrong signal by attacking Uber and Amazon, are out of touch with everything that was happening in India in the past 10 years. Yes, we have a new government that promises change, but to expect the elephant to move with the speed of a gazelle is unreal.
In fact, although the PM launched a high wattage ‘Make in India’ campaign just before leaving for the United States, nothing has changed on the ground when it comes to cutting red-tape.
Medium to large companies are forced to spend significant sums of money on legal fees only to deal with the harassment by tax and enforcement agencies. Most of them have legitimate money blocked by endless tax-related litigation. Please notice that the retrospective legislation following the Vodafone case has been left untouched by Modi sarkar and the dispute is still not settled.
Doing business in India means that Uber and Amazon should be prepared for similar skirmishes with numerous municipal and state level regulators and law enforcers, whose rulebook often dates back to the 19th century. Indian businesses have learnt to live with these hassles or to ‘grease’ their way forward—all this adds to the cost and hassles of doing business in India.
Coming back to the Uber case, some commentators have argued that RBI cannot be a regulator, supervisor, investigator and enforcement agency, all rolled into one. But it has combined those roles for over 65 years and Indian banks and companies have lived, and died, by its capricious rules.
Let’s not forget how a sudden change in RBI’s rules in the mid-1990s caused most non-banking finance companies to go belly up leading to thousands of depositors losing hard-earned savings invested with them. Nobody held RBI accountable because that is how India has worked.
Uber gives dignity to millions of Indians who, in the absence of adequate public transport, have to beg and plead and give in to extortion by auto-rickshaws and taxi-drivers. Amazon delivers products to your doorstep cheaper and faster. All this cuts no ice with Indian lawmakers or regulators. They are not obliged to look for a solution that helps people; they’d rather stick to old rules—even as those rules are violated with impunity.
But there is a slight chance that things may be different this time. Public pressure for better services, conveyed directly to the PM via social media, could make a difference.
Mr Modi’s own experience of using technology innovatively to reach the people should make him sympathetic to innovators. I believe that only a direct request from the PM will push government agencies to re-work rules quickly so that people benefit from innovation.
It is RBI’s stated policy to push people to switch from cash and cheque to electronic transactions. Based on this, Uber’s payment process should have been held up as the model for others to follow. But there is a big gap between RBI’s stated goals and its actions.
According to media reports, Uber is working at integrating a digital-wallet into its payment process through a tie-up with a couple of mobile payment gateways. Will this work? Remember, in the eight years since it closed down the Times of Money’s e-wallet or stored value payment card, we have yet to see an effective e-wallet with low transaction costs attract sizeable customers in India.
RBI has also been impervious to consumer protests about ‘convenience charges’ levied on electronic transactions. A workable e-wallet system, with low transaction charges, is the ideal solution for small-value online transactions to buy movie tickets, books, flowers or pay taxi fares, where the value at risk is low and there is no need for two-stage authentication. But, there again, RBI is worried that these low-denomination transactions will be used for gambling, lottery tickets and worse, to launder money.
But e-commerce in India is a $2.3billion business, which is growing at a scorching pace and companies will keep innovating for a piece of the action. While existing e-wallets offered by some banks are tedious, worth the effort only for high denomination transactions, new ones are being announced every day.
The Indian Railway Catering and Tourism Corporation (IRCTC) has launched an e-wallet which is structured as a rolling-deposit scheme where customers can maintain an account with IRCTC for e-bookings, which is topped up from time to time. This is to reduce the current hassles and risk involved in using credit and debit cards on the IRCTC system. The Citrus Pay app is another one that allows users to load value on an e-wallet from a credit or debit card.
It remains to be seen if Uber will find its way around RBI regulations or we will see the dawn of a new era, where the ‘Make in India’ is not just a slogan but a signal to regulators, policy-makers and investigation agencies to also move with the times to help and facilitate businesses that consumers want.
(Sucheta Dalal is the managing editor of Moneylife. She was awarded the Padma Shri in 2006 for her outstanding contribution to journalism. She can be reached at email@example.com