By Pam Martens and Russ Martens: February 25, 2016
In a feeble public relations move, Bill Dudley, the President of the Federal Reserve Bank of New York and FINRA, the self-regulatory body on Wall Street, are making noises about cleaning up the culture on Wall Street. It’s always dangerous to make any predictions when it comes to Wall Street but in this case we can confidently predict that when it comes to the New York Fed and FINRA, the only possible impact they could have on the culture is to make it worse.
The New York Fed didn’t see a problem for Bill Dudley’s spouse to collect $190,000 a year in deferred compensation from JPMorgan Chase while the New York Fed served as the bank’s main regulator. The New York Fed didn’t see a problem for Citigroup’s CEO, Sandy Weill, or JPMorgan CEO, Jamie Dimon, to sit on its Board of Directors as their banks embarked on a serial reign of abuses against the investing public. In 2013, Carmen Segarra, a lawyer and former Bank Examiner at the New York Fed, filed a lawsuit alleging that Relationship Managers at the New York Fed obstructed her investigation of Goldman Sachs and attempted to bully her into changing her negative findings. When Segarra refused, she was fired by the New York Fed according to the lawsuit. Segarra later produced internal tape recordings backing up the toothless regulation of Goldman by the New York Fed.
In 2012, Wall Street On Parade reported on how a Barclays’ bank employee revealed to a Senior Financial Economist at the New York Fed that his bank was not “posting um, an honest Libor.” (Libor is the benchmark interest rate used to set the rates for trillions of dollars of financial products around the globe.) That conversation provided an early window into one of the biggest cartel frauds in history. The conversation occurred in April 2008 and yet no one at the New York Fed saw any reason to alert the U.S. Justice Department that a key interest rate benchmark was being rigged.
The New York Fed epitomizes failing up. Timothy Geithner was the President of the New York Fed from November 17, 2003 right through the buildup of unprecedented leverage and toxic subprime assets on Wall Street. He continued in the position until 2009, despite failing to foresee the impending crash or the systemic corruption. As a reward for his negligence as a regulator, President Obama appointed him to become the U.S. Treasury Secretary in 2009, where he proceeded to oversee an unprecedented taxpayer bailout of Wall Street.
Exactly two months after Geithner took his seat as U.S. Treasury Secretary, he was called to testify before the U.S. House of Representatives’ Committee on Financial Services on March 26, 2009. During the hearing, Geithner was asked a question by Congressman Ron Paul. Geithner responded as follows:
“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.”
Geithner headed a key regulatory body for half a decade. It employed hundreds of bank examiners that were assigned to the biggest Wall Street banks. What exactly did he think his $400,000 salary at the New York Fed was for if he didn’t think he was a regulator?
While Geithner headed the New York Fed, Citigroup entered a death spiral in 2007 and 2008 as a result of obscene executive pay, off balance sheet debt and gross mismanagement of its far flung enterprises. Geithner’s appointment calendar suggests he saw his role as a “Relationship Manager” not a regulator. As Citigroup veered toward insolvency in 2007 and 2008, Geithner held 29 breakfasts, lunches, dinners and other meetings with Citigroup executives.
Geithner not only hosted Sandy Weill to lunch at the New York Fed, but on January 25, 2007, Geithner brought his teenage daughter to the lunch. Geithner’s appointment calendar shows his daughter sharing his chauffeured car to work with her father and accompanying him at his lunch with Weill. A few months later, on May 17, 2007, Geithner joined Weill for breakfast at the expensive Four Seasons.
As part of his clean up the culture road show, last November 5 Bill Dudley delivered a speech at a “Reforming Culture and Behavior in the Financial Services Industry Workshop.” Here’s an excerpt from the speech:
“Untrustworthy behavior on the scale that we have witnessed in financial services does not arise in a vacuum. Social science research makes it clear that context largely drives conduct. This is not a new insight. Adam Smith observed centuries ago that, independent of personal sentiment, we often behave according to what we ‘[see are] the established rules of behavior.’ We observe the activity around us, assess the norms of conduct and generally adapt to those norms in our own behaviors.”
Dudley has just perfectly defined the problem. He is just as perfectly clueless to see that he’s describing the New York Fed.
Now the Financial Industry Regulatory Authority, a self-regulator known as FINRA, has joined the culture clean-up brigade. In a statement earlier this month, FINRA noted that “One estimate places fines and litigation costs to firms, or their parent companies, related to cultural failures at over $300 billion since 2010.”
What FINRA is missing in this context is that crime is its own profit center on Wall Street. The firms may have paid $300 billion in fines and litigation costs but the crimes initially produced huge profits, obscene executive pay and multi-million dollar bonuses – monies that were never clawed back in the majority of cases. No one went to jail in the majority of these cases either.
FINRA sent a letter to brokerage firms last week and now appears to be looking at how training of sales managers and sales representatives is conducted on Wall Street. We can provide a little insight to FINRA in that regard.
Back in the early 90s, a Merrill Lynch stockbroker, Michael Stamenson, sold billions of dollars of complex securities to Orange County, California which ran a pooled investment fund for close to 200 cities and school districts in the county. The county lost $1.7 billion when the highly leveraged fund imploded, the county filed bankruptcy, resulting in serious job losses and cutbacks in social services. As a firm, Merrill made approximately $100 million in fees with Stamenson received $4.3 million in just the two-year period of ’93 and ’94.
When the case went to court, evidence was produced that included a sales training tape made by Merrill for rookie stockbrokers. Stamenson stars in the training tape and offers up this prescription for becoming a success at Merrill Lynch: “the tenacity of a rattlesnake, the heart of a black widow spider and the hide of an alligator.”
As evidence against Stamenson and executives at Merrill Lynch gained focus in the courtroom, Merrill Lynch continued to pay compensation of $750,000 a year to Stamenson. The company eventually settled the case for $400 million and sealed the documents. Merrill also paid $30 million directly to Orange County to settle the case and abruptly end a grand jury investigation. Once again, the documents and testimony were sealed from public view.
FINRA also plays a pivotal role in keeping Wall Street’s darkest secrets sealed from public scrutiny. FINRA is the body that runs Wall Street’s private justice system called mandatory arbitration where hearings are held in hotel rooms without the benefit of judge or jury, legal precedent, or case law. The arbitrators are frequently retreads from the depraved culture of Wall Street. The public is not allowed to attend the hearings as would be permitted if the case went to court.
A corrupted culture is killing Wall Street and setting it up for another epic collapse. But these are simply the wrong gatekeepers to deal with it.