six months ahead of the deadline.
In the recordings, one New York Fed employee compared it to Goldman “getting paid to watch a briefcase.” Silva states that the fee was $40 million and that potentially hundreds of millions more could be made from trading on the large number of shares Goldman would hold.
Santander and Goldman declined to respond to detailed questions about the deal.
Silva did not like the transaction. He acknowledged it appeared to be “perfectly legal” but thought it was bad to help Santander appear healthier than it might actually be.
“It’s pretty apparent when you think this thing through that it’s basically window dressing that’s designed to help Banco Santander artificially enhance its capital position,” he told his team before a big meeting on the topic with Goldman executives.
The deal closed the Sunday after the Friday email. The following week, Silva spoke with top Goldman people about it and told his team he had asked why the bank “should” do the deal. As Silva described it, there was a divide between the Fed’s view of the deal and Goldman’s.
“[Goldman executives] responded with a bunch of explanations that all relate to, ‘We can do this,’ ” Silva told his team.
Privately, Segarra saw little sense in Silva’s preoccupation with the question of whether “should” applied to the Santander deal. In an interview, she said it seemed to her that Silva and the other examiners who worked under him tended to focus on abstract issues that were “fuzzy” and “esoteric” like “should” and “reputational risk.”
Segarra believed that Goldman had more pressing compliance issues 2013 such as whether executives had checked the backgrounds of the parties to the deal in the way required by anti-money laundering regulations.
Segarra had joined the New York Fed on Oct. 31, 2011, as it was gearing up for its new era overseeing the biggest and riskiest banks. She was part of a reorganization meant to put more expert examiners to the task.
In the past, examiners known as “relationship managers” had been stationed inside the banks. When they needed an in-depth review in a particular area, they would often call a risk specialist from that area to come do the examination for them.
In the new system, relationship managers would be redubbed “business-line specialists.” They would spend more time trying to understand how the banks made money. The business-line specialists would report to the senior New York Fed person stationed inside the bank.
The risk specialists like Segarra would no longer be called in from outside. They, too, would be embedded inside the banks, with an open mandate to do continuous examinations in their particular area of expertise, everything from credit risk to Segarra’s specialty of legal and compliance. They would have their own risk-specialist bosses but would also be expected to answer to the person in charge at the bank, the same manager of the business-line specialists.
In Goldman’s case, that was Silva.
Shortly after the Santander transaction closed, Segarra notified her own risk-specialist bosses that Silva was concerned. They told her to look into the deal. She met with Silva to tell him the news, but he had some of his own. The general counsel of the New York Fed had “reined me in,” he told Segarra. Silva did not refer by name to Tom Baxter, the New York Fed’s general counsel, but said: “I was all fired up, and he doesn’t want me getting the Fed to assert powers it doesn’t have.”
This conversation occurred the day before the New York Fed team met with Goldman officials to learn about the inner workings of the deal.
From the recordings, it’s not spelled out exactly what troubled the general counsel. But they make clear that higher-ups felt they had no authority to nix the Santander deal simply because Fed officials didn’t think Goldman “should” do it.
Segarra told Silva she understood but felt that if they looked, they’d likely find holes. Silva repeated himself. “Well, yes, but it is actually also the case that the general counsel reined me in a bit on that,” he reminded Segarra.
The following day, the New York Fed team gathered before their meeting with Goldman. Silva outlined his concerns without mentioning the general counsel’s admonishment. He said he thought the deal was “legal but shady.”
“I’d like these guys to come away from this meeting confused as to what we think about it,” he told the team. “I want to keep them nervous.”
As requested, Segarra had dug further into the transaction and found something unusual: a clause that seemed to require Goldman to alert the New York Fed about the terms and receive a “no objection.”
This appeared to pique Silva’s interest. “The one thing I know as a lawyer that they never got from me was a no objection,” he said at the pre-meeting. He rallied his team to look into all aspects of the deal. If they would “poke with our usual poker faces,” Silva said, maybe they would “find something even shadier.”
But what loomed as a showdown ended up fizzling. In the meeting with Goldman, an executive said the “no objection” clause was for the firm’s benefit and not meant to obligate Goldman to get approval. Rather than press the point, regulators moved on.
Afterward, the New York Fed staffers huddled again on their floor at the bank. The fact-finding process had only just started. In the meeting, Goldman had promised to get back to the regulators with more information to answer some of their questions. Still, one of the Fed lawyers present at the post-meeting lauded Goldman’s “thoroughness.”
Another examiner said he worried that the team was pushing Goldman too hard.
“I think we don’t want to discourage Goldman from disclosing these types of things in the future,” he said. Instead, he suggested telling the bank, “Don’t mistake our inquisitiveness, and our desire to understand more about the marketplace in general, as a criticism of you as a firm necessarily.”
To Segarra, the “inquisitiveness” comment represented a fear of upsetting Goldman.
By law, the banks are required to provide information if the New York Fed asks for it. Moreover, Goldman itself had brought the Santander deal to the regulators’ attention.
Beim’s report identified deference as a serious problem. In an interview, he explained that some of this behavior could be chalked up to a natural tendency to want to maintain good relations with people you see every day. The danger, Beim noted, is that it can morph into regulatory capture. To prevent it, the New York Fed typically tries to move examiners every few years.
Over the ensuing months, the Fed team at Goldman debated how to demonstrate their displeasure with Goldman over the Santander deal. The option with the most interest was to send a letter saying the Fed had concerns, but without forcing Goldman to do anything about them.
The only downside, said one Fed official on a recording in late January 2012, was that Goldman would just ignore them.
“We’re not obligating them to do anything necessarily, but it could very effectively get a reaction and change some behavior for future transactions,” one team member said.
In the same recorded meeting, Segarra pointed out that Goldman might not have done the anti-money laundering checks that Fed guidance outlines for deals like these. If so, the team might be able to do more than just send a letter, she said. The group ignored her.
It’s not clear from the recordings if the letter was ever sent.
Silva took an optimistic view in the meeting. The Fed’s interest got the bank’s attention, he said, and senior Goldman executives had apologized to him for the way the Fed had learned about the deal. “I guarantee they’ll think twice about the next one, because by putting them through their paces, and having that large Fed crowd come in, you know we, I fussed at ’em pretty good,” he said. “They were very, very nervous.”
Segarra had worked previously at Citigroup, MBNA and Société Générale. She was accustomed to meetings that ended with specific action items.
At the Fed, simply having a meeting was often seen as akin to action, she said in an interview. “It’s like the information is discussed, and then it just ends up in like a vacuum, floating on air, not acted upon.”
Beim said he found the same dynamic at work in the lead up to the financial crisis. Fed officials noticed the accumulating risk in the system. “There were lengthy presentations on subjects like that,” Beim said. “It’s just that none of those meetings ever ended with anyone saying, ‘And therefore let’s take the following steps right now.'”
The New York Fed’s post-crisis reorganization didn’t resolve longstanding tensions between its examiner corps. In fact, by empowering risk specialists, it may have exacerbated them.
Beim had highlighted conflicts between the two examiner groups in his report. “Risk teams … often feel that the Relationship teams become gatekeepers at their banks, seeking to control access to their institutions,” he wrote. Other examiners complained in the report that relationship managers “were too deferential to bank management.”
In the new order, risk specialists were now responsible for their own examinations. No longer would the business-line specialists control the process. What Segarra discovered, however, was that the roles had not been clearly defined, allowing the tensions Beim had detailed to fester.
Segarra said she began to experience pushback from the business-line specialists within a month of starting her job. Some of these incidents are detailed in her lawsuit, recorded in notes she took at the time and corroborated by another examiner who was present.
Business-line specialists questioned her meeting minutes; one challenged whether she had accurately heard comments by a Goldman executive at a meeting. It created problems, Segarra said, when she drew on her experiences at other banks to contradict rosy assessments the business-line specialists had of Goldman’s compliance programs. In the recordings, she is forceful in expressing her opinions.
ProPublica and This American Life reached out to four of the business-line specialists who were on the Goldman team while Segarra was there to try and get their side of the story. Only one responded, and that person declined a request for comment. In the recordings, it’s clear from her interactions with managers that Segarra found the situation upsetting, and she did not hide her displeasure. She repeatedly complains about the business-line specialists to Kim, her legal and compliance manager, and other supervisors.
“It’s like even when I try to explain to them what my evidence is, they won’t even listen,” she told Kim in a recording from Jan. 6, 2012. “I think that management needs to do a better job of managing those people.”
Kim let her know in the meeting that he did not expect such help from the Fed’s top management. “I just want to manage your expectations for our purposes,” he told Segarra. “Let’s pretend that it’s not going to happen.”
Instead, Kim advised Segarra “to be patient” and “bite her tongue.” The New York Fed was trying to change, he counseled, but it was “this giant Titanic, slow to move.”
Three days later, Segarra met with her fellow legal and compliance risk specialists stationed at the other banks. In the recording, the meeting turns into a gripe session about the business-line specialists. Other risk specialists were jockeying over control of examinations, too, it turned out.
“It has been a struggle for me as to who really has the final say about recommendations,” said one.
“If we can’t feel that we’ll have management support or that our expertise per se is not valued, it causes a low morale to us,” said another.
On Feb. 21, 2012, Segarra met with her manager, Kim, for their weekly meeting. After covering some process issues with her examinations, the recordings show, they again discussed the tensions between the two camps of specialists.
Kim shifted some of the blame for those tensions onto Segarra, and specifically onto her personality: “There are opinions that are coming in,” he began.
First he complimented her: “I think you do a good job of looking at issues and identifying what the gaps are and you know determining what you want to do as the next steps. And I think you do a lot of hard work, so I’m thankful,” Kim said. But there had been complaints.
She was too “transactional,” Kim said, and needed to be more “relational.”
“I’m never questioning about the knowledge base or assessments or those things; it’s really about how you are perceived,” Kim said. People thought she had “sharper elbows, or you’re sort of breaking eggs. And obviously I don’t know what the right word is.”
Segarra asked for specifics. Kim demurred, describing it as “general feedback.”
In the conversation that followed, Kim offered Segarra pointed advice about behaviors that would make her a better examiner at the New York Fed. But his suggestions, delivered in a well-meaning tone, tracked with the very cultural handicaps that Beim said needed to change.
Kim: “I would ask you to think about a little bit more, in terms of, first of all, the choice of words and not being so conclusory.”
Beim report: “Because so many seem to fear contradicting their bosses, senior managers must now repeatedly tell subordinates they have a duty to speak up even if that contradicts their bosses.”
Kim: “You use the word ‘definitely’ a lot, too. If you use that, then you want to have a consensus view of definitely, not only your own.”
Beim report: “An allied issue is that building consensus can result in a whittling down of issues or a smoothing of exam findings. Compromise often results in less forceful language and demands on the banks involved.”
In Segarra’s recordings, there is some evidence to back Kim’s critique. Sometimes she cuts people off, including her bosses. And she could be brusque or blunt.
A colleague who worked with Segarra at the New York Fed, who does not have permission from their employer to be identified, told ProPublica that Segarra often asked direct questions. Sometimes they were embarrassingly direct, this former examiner said, but they were all questions that needed to be asked. This person characterized Segarra’s behavior at the New York Fed as “a breath of fresh air.”
ProPublica also reached out to three people who worked with Segarra at two other firms. All three praised her attitude at work and said she never acted unprofessionally.
In the meeting with Kim, Segarra observed that the skills that made her successful in the private sector did not seem to be the ones that necessarily worked at the New York Fed.
Kim said that she needed to make changes quickly in order to succeed.
“You mean, not fired?” Segarra
