The Ray Rice Video for the Financial Sector Has Arrived

Michael Lewis, the controversial and entertaining author who recently released "Flash Boys: A Wall Street Revolt," the book that uncovered the goings-on of the huge program traders that now dominate stock market trading, commented that

“The Ray Rice video for the financial sector has arrived.”

after listening to audio tapes secretly recorded by a New York Fed assigned to Goldman Sachs.

The 45 hours of tapes, made by Carmen Segarra, a former NY Fed worker, capture former co-workers, whose job was to keep banks like Goldman Sachs in line, instead deferring to the banks, being unwilling to take action and being extremely passive...

The comparison by Mr. Lewis is particularly apt since, as in the Ray Rice situation, the recorded tapes might wake up those who might somehow have been unaware of an already bad situation. Revealing the cooperation of regulators with some of the shenanigans of big banks ought not be a surprise when one considers the intimate relationship between the banking industry and the regulatory agencies. After all, those "watching" the big banks frequently quit their government jobs after a few years and get hired by those same banks. Common sense tells us that their own self-interest will inhibit both vigilance and stern action, don't you think?

What's not surprising about the reaction of the NY Fed to the allegations of their employee assigned to Goldman is this:

In a statement, the New York Fed said it “categorically rejects the allegations being made about the integrity of its supervision of financial institutions.”

The regulator noted that Ms. Segarra had sought a $7 million settlement with the regulator, and had worked for the New York Fed for less than seven months.

“The decision to terminate Ms. Segarra’s employment with the New York Fed was based entirely on performance grounds, not because she raised concerns as a member of an examination team about any institution,” the regulator said in its statement.

Admittedly the claims of an incompetent or disaffected employee have to be taken with a grain of salt. But if these tapes really do depict regulators being overly-deferential to the bankers, one positive result of such a revelation would be some sorts of restrictions being placed on regulators moving to the companies they regulate. Talk about doing this has been around for years, and nothing ever gets past the talking stage. It's all about the money here, and those whose careers are based on moving from regulator to "regulatee" - sometimes back and forth - in the interest of building well-compensated career in the financial services industry will fight tooth and nail to keep things as they are.

Indeed, the tooth and nail response was reflected in the headline of The Wall Street Journal's version of this story:

New Fed/Goldman Tapes Emerge with Familiar Allegations

Using "Familiar" serves as a damper, a pooh-poohing of the seriousness of the charges, as in, "Oh, this sort of stuff pops up from time to time, but there's not much to it." This and the fact that the Journal published the story on a Friday afternoon, a time reserved for stories for which publishers don't particularly need or want lots of readers demonstrates their dismissal of the story. For that reason, it wouldn't be unreasonable to question the ultimate impact of these tapes, specifically whether they will lead to any reform of the current tainted system. But at the very least, it might be interesting to watch the financial sector squirm its way out of this one.