Skip to main content

NEW YORK (TheStreet) -- This American Life and ProPublica recently broke the story of the secret tapes of the Federal Reserve's supervision of Goldman Sachs (GS) - Get Goldman Sachs Group Inc. (The) Report . If the Fed as a regulator and Goldman Sachs as an advisor did not have such a bad reputation, one might say the tapes were shocking.

The most interesting part of the tapes is where the whistleblower, Carmen Segarra, is asked to change her report by her boss. Segarra says Goldman Sachs does not have a conflict of interest policy. The chief supervisor at Goldman Sachs at the time can't convince her to recant her opinion. Soon after she was fired, just seven months into the job at the New York Fed.

The problem seems to be that Segarra did not fit in -- despite her impressive educational accomplishments. The Fed employs a lot of people with degrees from prestigious universities, just like the Wall Street banks.

The report suggests that the federal bureaucracy attracts a lot of people who don't mind keeping their mouths shut, just closing their eyes and ears to all the bad stuff happening around them. Segarra actually cared. Unfortunately, caring appears to be a career-killer for a Federal Reserve supervisor.

At the time, the "VampireSquid" -- as Goldman was infamously called by Rolling Stone--had no policy to prevent its clients from being treated like Muppets, a reference to what Goldman internally called its unsophisticated customers. But the Fed had a regulation that  required bank holding companies, such as Goldman Sachs, to have a conflict of interest policy. At the time, Goldman Sachs was advising a Muppet, which shall remain nameless, and which was a merger target.

It just so happened that Goldman Sachs held a $4 billion stake in the acquirer and one of the Goldman bankers advising the target held $340,000 worth of the acquirer's stock.

Segarra was fired for complaining about this kind of thing. And she's not alone in being attacked for criticizing banks.

Here's how I found that the regulators are spineless until a whistleblower appears.

I have never worked for the federal government or any regulator, but once I was asked to testify before Congress about what a raw deal taxpayers were getting on their warrant investments in the banks.

My oral testimony, which I circulated to reporters prior to the meeting, criticized the head of the Troubled Asset Relief Program because he had tipped offMorgan Stanley (MS) - Get Morgan Stanley Report about the minimum price acceptable to repurchase the taxpayers' warrant.

Scroll to Continue

TheStreet Recommends

Hours before the hearing I got a call from the U.S. Treasury's TARP press office. The person on the phone urged me to not repeat the criticisms that I had circulated to the press. Cover it up.

I leveled my criticisms in the hearing anyway. The TARP head stepped down a few months after my testimony.

I endured a browbeating, but Segarra must have gone through that every day. And I'm so glad I work over 1,000 miles from either Wall Street or Washington.

The greatest failure of the Dodd-Frank bill was to give so much discretion to the Fed's spineless regulators. The Fed has had all the tools it has needs to break up the big banks ever since Dodd Frank passed in 2010. But instead it is blocking and tackling for the institutions that caused the last crisis and will most likely lead to the next financial crisis and stock market crash. Congress should act.

A good first step would be to enact the Brown-Vitter bill to force giant banks with more than $500 billion in assets to hold as much capital as their smaller competitors.

But don't hold your breath waiting for real reform of the Too-Big-to-Fail system. Wall Street has as many friends in the White House and Capitol Hill as at the New York Fed.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

TheStreet Ratings team rates GOLDMAN SACHS GROUP INC as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation: 

"We rate GOLDMAN SACHS GROUP INC (GS) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, attractive valuation levels, increase in stock price during the past year, growth in earnings per share and increase in net income. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."

You can view the full analysis from the report here: GS Ratings Report