By Pam Martens and Russ Martens: November 5, 2015 

According to the Random House dictionary, Stockholm Syndrome is “an emotional attachment to a captor formed by a hostage as a result of continuous stress, dependence, and a need to cooperate for survival.” Regulatory capture – where big banks are actually the ones calling the shots to their regulators – appears to have morphed into Stockholm Syndrome based on a Congressional hearing yesterday. 

House Financial Services Committee Chairman Jeb Hensarling dropped a bombshell on Federal Reserve Chair Janet Yellen in opening questions yesterday on the Fed’s role of supervising the largest, most systemically dangerous banks.

Hensarling queried if the Fed had crossed the line from being regulator to manager. We think the question should have been has the Fed devolved from regulator to emotionally-attached hostage. (There’s plenty of evidence for the latter as we’ll explain later in this piece.) The exchange went like this:

Hensarling: “We’ve had a number of individuals come to our Committee to tell us that Fed officials have regularly attended corporate board meetings of the systemically important financial institutions under the Fed’s purview. Is that true?”

Yellen: “So, I’m not sure if that’s true…It’s conceivable that that might have occurred. I’m not saying that it did not occur. I’d have to get back to you…”

Hensarling: “If it did occur, what legal authority would you cite for having employees of the Fed invite themselves into corporate board rooms…”

The first thought that came to mind during this exchange was how Jack Grubman, the disgraced telecom analyst at Salomon Smith Barney, explained to BusinessWeek why he, a person required under law to remain objective, independent and exercise a duty of care in the stock recommendations he was spewing out to the public, was attending WorldCom board meetings and giving investment advice to executives. Grubman stated the following to BusinessWeek on May 14, 2000:

“What used to be a conflict is now a synergy…Someone like me who is banking-intensive would have been looked at disdainfully by the buy side 15 years ago. Now they know that I’m in the flow of what’s going on. That helps me help them think about the industry…Objective? The other word for it is uninformed.”

Two years later, WorldCom announced a $3.8 billion accounting fraud that would eventually grow to an $11 billion fraud. The stock plunged to 9 cents on the first announcement. On July 21, 2002, WorldCom filed for the largest bankruptcy in U.S. history. Three years later, its CEO, Bernie Ebbers, was sentenced to 25 years in prison, where he remains.

The Securities and Exchange Commission eventually barred Grubman from the financial industry for life and fined him $15 million for issuing fraudulent research. Looking back, Grubman likely wishes he had taken a pass on sitting in on those board meetings.

Wall Street On Parade has been warning for some time that things have gotten way too chummy and “synergistic” between the Federal Reserve and the mega Wall Street banks that it regulates.

In July 2012, we reported that the New York Fed had been given an early warning that the interest rate benchmark, Libor, was being rigged. It sat on that information. In the same month, we reported that Ann Darby, wife of the New York Fed President, William Dudley, had holdings of more than $1.5 million in deferred income accounts at JPMorgan Chase where she had worked previously, and was receiving $190,000 in payments annually from those accounts – payments which were expected to continue through 2021. The Fed did not see a problem with this despite the fact that the New York Fed was a key regulator of JPMorgan Chase.

In November 2013, we reported on how the trading floor of the New York Fed had begun to mirror the trading floors across Wall Street, complete with ultra expensive Bloomberg trading terminals and speed dials to Wall Street. The New York Fed’s trading floor begins monitoring markets around the world at 4:30 a.m. each day. The New York Fed is the only one of the 12 regional Fed banks to have a trading floor and the majority of Americans would be shocked to know that one exists. The New York Fed denied our requests for photographs of the floor. We obtained them from fleeting shots in educational videos released by the Fed.

In December 2013, we reported on the Fed’s “Relationship Managers” who are assigned to managing the “relationships” with the banks the Fed supervises. That sounds more like a concierge job for pampered guests at a ritzy hotel rather than a tough cop overseeing serial miscreants on Wall Street.

Last year we reported that even after JPMorgan Chase received two deferred felony counts for aiding and abetting the Madoff fraud, the New York Fed made it custodian of $1.7 trillion (that’s trillion with a “t”) of the Mortgage-Backed Securities (MBS) it had purchased under its various quantitative easing programs.

Then there was the case of Carmen Segarra, a lawyer and former bank examiner at the New York Fed. Segarra charged in a lawsuit filed in October 2013 that she was told to change her negative examination of Goldman Sachs by colleagues at the New York Fed, who also obstructed and interfered with her investigation. According to her lawsuit, when she refused to alter her findings, she was terminated in retaliation and escorted from the Fed premises. After her case was dismissed by a Judge whose husband was representing Goldman Sachs, Segarra turned over her 46 hours of secretly made tape recordings of the mattter to ProPublica’s Jake Bernstein and public radio’s This American Life.

In May of this year we reported that as the U.S. Justice Department was preparing to accept a criminal felony plea from JPMorgan Chase for its role in rigging foreign exchange markets, the perpetually blindfolded New York Fed saw nothing wrong with keeping Troy Rohrbaugh, the head of Foreign Exchange Trading at JPMorgan Chase, as the Chair of its own Foreign Exchange Committee.

When Fed Chair Janet Yellen testifies before Congress, she sounds like an extremely knowledgeable, level-headed central banker. But the more we learn about the Fed as a regulator and supervisor of the biggest, interconnected, hopelessly complex banks in the world, the more we are certain that it was one of the greatest Congressional failings of all time for the Dodd-Frank legislation to give the Fed greater regulatory authority. The Fed was a hopelessly failed regulator going into the crash of 2008 and it is a hopelessly failed regulator now.