By Pam Martens and Russ Martens: March 16, 2015

There is now a movement in Congress to strip the Federal Reserve Bank of New York of its regulatory oversight of the biggest Wall Street banks. The movement has roots among both Democrats and Republicans who are fed up with the continuing unbridled abuses of the public trust by the unruly hooligans on Wall Street and their timid regulator, the New York Fed.

The push for change is critically important for a number of reasons. Major among them is the perception that New York and its politicians are more concerned about what’s in the best interests of New York residents and less about what’s best for the country as a whole. Two trillion dollar too-big-to-fail banks may pose a systemic risk for the nation but they’re a handy source of quick, mega loans for the hedge funds and real estate interests in New York, whose employees’ free-spending ways are a boon to the pricey restaurants and upscale stores that dot the Manhattan landscape.

No two individuals have exemplified the hubris of the New York politician’s way of thinking better than Senator Chuck Schumer and former Mayor Michael Bloomberg, a billionaire whose fortune derives from Wall Street.

Just one year before Wall Street’s deregulated landscape would usher in the greatest financial collapse since 1929, Schumer and Bloomberg were pushing for greater deregulation of Wall Street. The two hired McKinsey & Company to study any threats that might be lurking to New York City’s global dominance in financial services.

On January 22, 2007, the pair released the McKinsey report, titled: “Sustaining New York’s and the US’ Global Financial Services Leadership.” In a press release announcing the report, Bloomberg stated: “Our capital markets and financial services firms will only enjoy continuing growth — growth that our city expects, needs and demands — if we take seriously the challenges from rapidly-expanding competitors in Europe and Asia.”

At that very moment in time, the greatest threat to America’s competitiveness and its economic survival was not foreign competition, it was a collapse in corporate ethics on Wall Street; massive leverage; off balance sheet accounting; the unregulated issuance of toxic waste; and the intertwining of banks carrying insured deposits backed by the taxpayers with casino-style investment banks.

But Schumer and Bloomberg were blind to these risks – they wanted more deregulation and greater perks for Wall Street. One of the reforms sought was an overhaul of the legal system. In their cover letter to the McKinsey report, Schumer and Bloomberg wrote that the U.S. did not effectively discourage “frivolous litigation” against Wall Street and they wanted to see “legal reforms” to reduce “spurious and meritless litigation.”

The outrage of this quest for reforming the U.S. legal system to benefit Wall Street was that Wall Street had already become a highly effective wealth stripping enterprise because of a perverted legal landscape that tilted the playing field heavily in Wall Street’s favor.

At that time, and to this very day, Wall Street is the only industry in America that forces both its workers and its customers to surrender their rights to the nation’s courts and accept a private justice system as a condition of working on Wall Street or holding an account there. This legal perversion is called mandatory arbitration and effectively guts the Seventh Amendment to the U.S. Constitution which guarantees: “In suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise reexamined in any court of the United States, than according to the rules of the common law.”

A self-regulator of Wall Street, the Financial Industry Regulatory Authority, with heavy industry influence, sits atop this private justice system which restricts the public’s right to know by typically preventing reporters’ access to the proceedings and issuing only sketchy decisions. And unlike the court system, it is next to impossible to appeal an arbitrators’ decision.

Schumer and Bloomberg also stressed that the Wall Street banks were overburdened with regulations, writing in a Wall Street Journal OpEd that “regulatory bodies are often competing to be the toughest cop on the street.” That’s the howler of the decade.

On March 26, 2009, just months into the greatest financial collapse in 80 years, Tim Geithner, the President of the New York Fed, told an astonished U.S. House of Representatives that he was not a Wall Street regulator. Geithner testified in response to a question from Congressman Ron Paul. Geithner stated:

“That was a very thoughtful set of questions. I just want to correct one thing. I have never been a regulator, for better or worse. And I think you are right to say that we have to be very skeptical that regulation can solve all these problems. We have parts of the system which are overwhelmed by regulation…It wasn’t the absence of regulation that was a problem. It was, despite the presence of regulation, you got huge risks built up.”

At the time, the New York Fed was a key regulator of Wall Street. How was it possible that its President didn’t understand his job? In her book, Bull by the Horns, Sheila Bair, the Chair of the FDIC during the crisis, looks at the regulatory hubris around the collapse of Citigroup in 2008. Bair writes:

“By November [2008], the supposedly solvent Citi was back on the ropes, in need of another government handout. The market didn’t buy the OCC’s and NY Fed’s strategy of making it look as though Citi was as healthy as the other commercial banks. Citi had not had a profitable quarter since the second quarter of 2007. Its losses were not attributable to uncontrollable ‘market conditions’; they were attributable to weak management, high levels of leverage, and excessive risk taking. It had major losses driven by their exposures to a virtual hit list of high-risk lending; subprime mortgages, ‘Alt-A’ mortgages, ‘designer’ credit cards, leveraged loans, and poorly underwritten commercial real estate. It had loaded up on exotic CDOs and auction-rate securities. It was taking losses on credit default swaps entered into with weak counterparties, and it had relied on unstable volatile funding – a lot of short-term loans and foreign deposits. If you wanted to make a definitive list of all the bad practices that had led to the crisis, all you had to do was look at Citi’s financial strategies…What’s more, virtually no meaningful supervisory measures had been taken against the bank by either the OCC or the NY Fed…Instead, the OCC and the NY Fed stood by as that sick bank continued to pay major dividends and pretended that it was healthy.”

Geithner, the New York Fed President, wasn’t exactly just standing by. During 2007 and 2008 he held 29 breakfasts, lunches, dinners and other get-togethers with Citigroup executives, according to his appointment calendars. He functioned not as a regulator but as the hobnobber-in-chief. On many of these occasions, Geithner met privately with Citigroup officials, without other Fed staff, and traveled to Citigroup’s corporate headquarters in Manhattan rather than summoning Citigroup officials to come to the New York Fed offices where official minutes of the meetings might have been taken.

The current President of the New York Fed is William Dudley. On November 21, 2014, Dudley was summoned to appear before the Senate Subcommittee on Financial Institutions and Consumer Protection. The hearing came on the heels of a series of regulatory lapses by the New York Fed and the release of internal tape recordings by Carmen Segarra, a former bank examiner who has charged that she was fired by the New York Fed in retaliation for refusing to alter her negative bank examination of Goldman Sachs. Portions of the tape recordings were released by ProPublica and public radio’s This American Life, strongly suggesting a culture of deference to powerful Wall Street interests at the New York Fed.

At the Senate hearing, Dudley testified that he didn’t see his role at the New York Fed as a cop on the beat but rather “more of a fire warden,” making sure institutions don’t catch on fire and burn down. That mindset seems to echo the view of Schumer and Bloomberg — that it’s the job of New York regulators to protect the Wall Street firms, rather than to protect the public interest.

This New York mindset is not going to change. That’s why Wall Street regulation must move out of New York.