A version of this story was co-published with The Washington Post.
In the spring of 2012, a
senior examiner with the Federal Reserve Bank of New York determined that Goldman
Sachs had a problem.
Under a Fed mandate, the
investment banking behemoth was expected to have a company-wide policy to
address conflicts of interest in how its phalanxes of dealmakers handled
clients. Although Goldman had a patchwork of policies, the examiner concluded
that they fell short of the Fed’s requirements.
That finding by the examiner,
Carmen Segarra, potentially had serious implications for Goldman, which was
already under fire for advising clients on both sides of several
multibillion-dollar deals and allegedly putting the bank’s own interests above those
of its customers. It could have led to closer scrutiny of Goldman by regulators
or changes to its business practices.
Before she could formalize
her findings, Segarra said, the senior New York Fed official who oversees
Goldman pressured her to change them. When she refused, Segarra said she was
called to a meeting where her bosses told her they no longer trusted her
judgment. Her phone was confiscated, and security officers marched her out of
the Fed’s fortress-like building in lower Manhattan, just 7 months after being hired.
“They wanted me to falsify my
findings,” Segarra said in a recent interview, “and when I wouldn’t, they fired
me.”
Today, Segarra
filed a wrongful termination lawsuit against the New York Fed in federal court in
Manhattan seeking reinstatement and damages. The case provides a detailed look
at a key aspect of the post-2008 financial reforms: The work of Fed bank
examiners sent to scrutinize the nation’s “Too Big to Fail” institutions.
In hours of interviews with
ProPublica, the 41-year-old lawyer gave a detailed account of the events that preceded
her dismissal and provided numerous documents, meeting minutes and
contemporaneous notes that support her claims. Rarely do outsiders get such a
candid view of the Fed’s internal operations.
Segarra is an expert in legal and regulatory compliance whose
previous work included jobs at Citigroup and the French bank Société Générale. She was part of a wave of new examiners hired by the
New York Fed to monitor systemically important banks after passage in July 2010
of the Dodd-Frank regulatory overhaul, which gave the Fed new oversight
responsibilities.
Goldman is known for having
close ties with the New York Fed, its primary regulator. The current president
of the New York Fed, William Dudley, is a former Goldman partner. One of his New
York Fed predecessors, E. Gerald Corrigan, is currently a top executive at
Goldman. At the time of Segarra’s firing, Stephen
Friedman, a former chairman of the New York Fed, was head of the risk committee
for Goldman’s board of directors.
In an email, spokesman Jack Gutt said the New York Fed could not respond to detailed
questions out of privacy considerations and because supervisory matters are confidential. Gutt
said the Fed provides “multiple venues and layers of recourse for employees to freely
express concerns about the institutions it supervises.”
“Such concerns are treated
seriously and investigated appropriately with a high degree of independence,”
he said. “Personnel decisions at the New York Fed are based exclusively on
individual job performance and are subject to thorough review. We categorically
reject any suggestions to the contrary.”
Dudley would not have been
involved in the firing, although he might have been informed after the fact,
according to a Fed spokesman.
Goldman also declined to
respond to detailed questions about Segarra. A
spokesman said the bank cannot discuss confidential supervisory matters. He
said Goldman “has a comprehensive approach to addressing conflicts through
firm-wide and divisional policies and infrastructure” and pointed to a bank document
that says Goldman took recent steps to improve management of conflicts.
Segarra’s termination has not been made public before
now. She was specifically assigned to assess Goldman’s conflict-of-interest
policies and took a close look at several deals, including a 2012 merger
between two energy companies: El Paso Corp. and Kinder Morgan. Goldman had a $4
billion stake in Kinder Morgan while also advising El Paso on the $23 billion deal.
Segarra said she discovered
previously unreported deficiencies in Goldman’s efforts to deal with its
conflicts, which were also criticized by
the judge presiding over a shareholder lawsuit concerning the merger.
Her lawsuit also alleges that
she uncovered evidence that Goldman falsely claimed that the New York Fed had
signed off on a transaction with Santander, the Spanish bank, when it had not.
A supervisor ordered her not to discuss the Santander matter, the lawsuit says,
allegedly telling Segarra it was “for your
protection.”
‘Eyes Like Saucers’
The New York Fed is one of 12
regional quasi-private reserve banks. By virtue of its location, it supervises
some of the nation’s most complex and important financial institutions. After
the 2008 financial crisis, disparate voices pointed to failures of enforcement by
the New York Fed as a key reason banks took on too much risk.
Even Fed officials acknowledged shortcomings. After Dodd-Frank, new examiners like Segarra, called “risk specialists,” were hired
for their expertise. They were in addition to other Fed staffers, dubbed
“business line specialists,” some of whom were already embedded at
the banks.
Segarra believed she had found
the perfect home when she joined the New York Fed’s legal and compliance risk
specialist team in October 2011. It was a prestigious job, insulated from
business cycles, where she could do her part to prevent another financial
meltdown. Her skills, honed at Harvard, Cornell Law School and the banks where
she had worked, consisted of helping to create the policies and procedures needed
to meet government financial regulations.
As part of their first
assignment, Fed officials told Segarra’s group of
risk specialists to examine how the banks in which they were stationed complied
with a Fed Supervision and Regulation Letter issued in 2008.
The letter, known as SR 08-08, emphasizes
the importance of having company-wide programs to manage risks at firms like
Goldman, which engage in diverse lines of business, from private wealth
management and trading to mergers and acquisitions. The programs are supposed
to be monitored and tested by bank compliance employees to make sure they are
working as intended.
“The Fed recognized that
financial conglomerates should act like truly combined entities rather than
separate divisions or entities where one group has no idea what the other group
is doing,” said Christopher Laursen, an economic consultant and former Federal Reserve
employee who helped draft the supervisory letter.
In 2009, a review by the Fed had found problems with its efforts to ensure that banks followed the policy,
which also says that bank compliance staffers must “be appropriately
independent of the business lines” they oversee.
Segarra’s team included examiners placed at nine other “Too Big
to Fail” banks, including Citigroup, JPMorgan Chase, Deutsche Bank and
Barclays.
Segarra said her bosses told her to focus on Goldman’s conflict-of-interest
policies. The firm had long been famous for trying to corral business from every
part of the deals it worked on. “If you have a conflict, we have an interest,” is
an oft-told joke on Wall Street about the firm’s approach.
The year before Segarra
joined the Fed, for instance, Goldman had received a drubbing from the Securities
and Exchange Commission and a Senate subcommittee over conflicts related to Abacus,
a mortgage transaction the bank constructed. The SEC imposed a $550 million
fine on the bank for the deal. A January 2011 Goldman report
concluded that the firm should “review and update conflicts-related
policies and procedures, as appropriate.”
Initial meetings between the New
York Fed and Goldman executives to review the bank’s policies did not go well,
said Segarra, who kept detailed minutes.
When the examiners asked in
November 2011 to see the conflict-of-interest policy, they were told one didn’t
exist, according to the minutes. “It’s probably more than one document — there
is no one policy per se,” the minutes recount one Goldman executive as saying.
The discussion turned to the name of the group that oversaw conflicts at Goldman:
“Business Selection and Conflicts Resolution Group.” Segarra’s
supervisor, Johnathon Kim, asked if business
selection and conflicts were, in fact, two different groups. He was told they
were not, the minutes show.
Goldman officials stated that
the bank did not have a company-wide conflict-of-interest program, Segarra’s minutes show. Moreover, the head of the business
selection and conflicts group, Gwen Libstag, who is
not a lawyer, said in a subsequent meeting on Dec. 8 that she did not consider what her staff did a “legal and
compliance function,” according to Segarra’s minutes.
“That’s why it’s called
business selection,” another Goldman executive added. “They do both.”
Given the Fed’s requirements,
the regulators were stunned, Segarra recounted in an
interview. “Our eyes were open like saucers,” she said. “Business selection is
about how you get the deal done. Conflicts of interest acknowledge that there
are deals you cannot do.”
After the Dec. 8 meeting, the
New York Fed’s senior supervising officer at Goldman, Michael Silva, called an
impromptu session with Fed staffers, including Segarra. Silva said he was worried
that Goldman was not managing conflicts well and that if the extent of the
problem became public, clients might abandon the firm and cause serious
financial damage, according to Segarra’s contemporaneous
notes.
A Chinese Wall In Their Heads
As part of her examination, Segarra
began making document requests. The goal was to determine what policies Goldman
had in place and to see how they functioned in Kinder Morgan’s acquisition of El
Paso. The merger was in the news after some El Paso shareholders filed a lawsuit
claiming they weren’t getting a fair deal.
Although Segarra reported
directly to Kim, she also had to keep Silva abreast of her examinations. Silva,
who is also a lawyer, had been at the Fed for 20 years and previously had
served as a senior vice president and chief of staff for Timothy Geithner while
he was New York Fed president. As a senior vice president and senior
supervisor, Silva outranked Kim in the Fed hierarchy.
Segarra said James Bergin,
then head of the New York Fed’s legal and compliance examiners, noted at a November
meeting that there was tension between the new risk specialists and old-guard
supervisors at the banks. Segarra said the tension
surfaced when she was approached in late December by a Fed business line specialist
for Goldman, who wanted to change Segarra’s Dec. 8
meeting minutes.
Segarra told her Fed colleague that she could send any
changes to her. When Segarra next met with her fellow
risk specialists, she said she told them what had transpired. They told her
that nobody should be allowed to change her meeting minutes because they were
the evidence for her examination.
Around that time, Silva had a
meeting with Segarra, she said. According to her notes, Silva warned her that sometimes new examiners didn’t recognize how they are perceived
and that those who are taken most seriously are the most quiet. Segarra took it as more evidence of tension between the two
groups of regulators.
Bergin, Silva and Kim did not
respond to requests for comment.
By mid-March 2012, Goldman
had given Segarra and a fellow examiner from the New York State Banking
Department documents and written answers to their detailed questions. Some of
the material concerned the El Paso-Kinder Morgan deal.
Segarra and other examiners had
been pressing Goldman for details about the merger for months. But it was from news
reports about the shareholder lawsuit that they learned the lead Goldman banker
representing El Paso, Steve Daniel, also had a $340,000 personal investment in
Kinder Morgan, Segarra said.
Delaware Chancery Court Judge
Leo Strine had issued a 34-page opinion in the case,
which eventually settled. The opinion castigated both El Paso’s leadership and Goldman for their poor handling of
multiple conflicts of interest.
At the New York Fed, Goldman
told the regulators that its conflict-of-interest procedures had worked well on
the deal. Executives said they had “exhaustively” briefed the El Paso board of
directors about Goldman’s conflicts, according to Segarra’s
meeting minutes.
Yet when Segarra
asked to see all board presentations involving conflicts of interest and the
merger, Goldman
responded that its Business Selection and Conflict Resolution Group
“as a general matter” did not confer with Goldman’s board. The bank’s responses
to her document requests offered no information from presentations to the El
Paso board discussing conflicts, even though lawsuit filings indicate such
discussions occurred.
Goldman did provide documents
detailing how it had divided its El Paso and Kinder Morgan bankers into “red
and blue teams.” These teams were told they could not communicate with each
other — what the industry calls a “Chinese Wall” — to prevent sharing
information that could unduly benefit one party.
Segarra said Goldman seating
charts showed that that in one case, opposing team members had adjacent
offices. She also determined that three of the El Paso team members had
previously worked for Kinder Morgan in key areas.
“They would have needed a
Chinese Wall in their head,” Segarra said.
Pressure To Change Findings
According to Segarra’s lawsuit, Goldman executives acknowledged on
multiple occasions that the bank did not have a firm-wide conflict-of-interest
policy.
Instead, they provided copies
of policies and procedures for some of the bank’s divisions. For those that did
not have a division-wide policy, such as the investment management division,
they offered what was available. The policy for the private banking group stated that employees shouldn’t write down their conflicts in “emails or
written communications.”
“Don’t put that in an email
in case we get caught?” Segarra said in an interview.
“That’s a joke.”
Segarra said all the policies were missing components required
by the Fed.
On March 21, 2012, Segarra
presented her conclusion that Goldman lacked an acceptable conflict-of-interest
policy to her group of risk specialists from the other “Too Big to Fail” banks.
They agreed with her findings, according to Segarra and another examiner who
was present and has requested anonymity.
Segarra’s group discussed possible sanctions against the bank,
but the final decision was up to their bosses. A summary sheet from the meeting
recommended downgrading Goldman from “satisfactory” to “fair” for its policies and
procedures, the equivalent of a “C” in a letter grade.
A week later, Segarra
presented her findings to Silva and his deputy, Michael Koh,
and they didn’t object, she said. Reached by ProPublica, Koh declined to comment.
In April, Goldman assembled some
of its senior executives for a meeting with regulators to discuss issues raised
by documents it had provided. Segarra said she asked Silva to invite officials
from the SEC, because of what she had learned about the El Paso-Kinder Morgan merger,
which was awaiting approval by other government agencies.
Segarra said she and a fellow
examiner from New York state’s banking department had prepared
65 questions. But before the meeting, Silva told her she could only ask
questions that did not concern the El Paso-Kinder Morgan merger, she said.
Nonetheless, SEC officials
brought it up. Goldman executives said they had no process to check the
personal holdings of bankers like Steve Daniel for possible conflicts,
according to notes Segarra took at the time. Asked by Segarra for Goldman’s definition
of “conflicts,” the bank’s general counsel, Greg Palm, responded that it could
be found in the dictionary, she said.
“What they should have is an
easy A-B-C approach to how to manage conflicts,” Segarra said. “But they
couldn’t even articulate what was a conflict of interest.”
Goldman declined a request to
make Palm available for comment.
As the Goldman examination moved
up the Fed’s supervisory chain, Segarra said she began to get pushback. According
to her lawsuit, a colleague told Segarra in May that
Silva was considering taking the position that Goldman had an acceptable
firm-wide conflict-of-interest policy.
Segarra quickly sent an email to her bosses reminding them
that wasn’t the case and that her team of risk
specialists was preparing enforcement recommendations.
In response, Kim sent an
email saying Segarra was trying to “front-run the supervisory process.” Two
days later, a longer email arrived from Silva, stating that “repeated
statements that you have made to me that [Goldman] does not have a [conflict-of-interest]
policy AT ALL are debatable at best, or alternatively, plainly incorrect.”
As evidence, Silva cited the
2011 Goldman report that called for a revamp of its conflict-of-interest procedures,
as well as the company’s code of conduct — neither of which Segarra believed met the Fed’s requirements.
While not commenting on
Goldman’s situation, Laursen, the consultant who
helped draft the Fed policy, said the idea is to police conflicts across
divisions. “It would need to be a high-level or firm-wide policy,” he said,
that “would identify the types of things that should not occur and the
processes and monitoring that make sure they don’t.”
In its email to ProPublica,
Goldman cited a May report from its Business Standards Committee that says the
company completed an overhaul of its business practices earlier this year that
included new policies and training for managing conflicts.
Before Segarra
could respond to Silva’s email, Koh summoned her to a
meeting. For more than 30 minutes, he and Silva insistently repeated that they
did not agree with her findings concerning Goldman, she said.
Segarra detailed all the
evidence that supported her conclusion, she said. She offered to participate in
a wider meeting with New York Fed personnel to discuss it further. Because Fed
officials would ultimately have to ratify her conclusions, she let them know she
understood that her findings were subject to change.
Silva and his deputy did not
engage with her arguments during the meeting. Instead, they kept reiterating that
she was wrong and should change her conclusions, she said.
Afterward, Segarra said she
sent an email to Silva detailing why she believed her findings were correct and
stating that she could not change them. There was just too much evidence to the
contrary, she said in an interview.
Three business days later,
Segarra was fired.
Segarra has no evidence that Goldman was involved. Silva told
her that the Fed had lost confidence in her ability to follow directions and
not jump to conclusions.
Today, Segarra
works at another financial institution at a lower level than she feels her qualifications
merit. She worries about the New York Fed’s ability to stop the next financial
crisis.
“I was just documenting what
Goldman was doing,” she said. “If I was not able to push through something that
obvious, the Federal Reserve Bank of New York certainly won’t be capable of
supervising banks when even more serious issues arise.”
ProPublica research director Liz Day contributed to
this story.
