The New York Fed didn’t see a problem for Bill Dudley’s spouse to collect $190,000 a year in deferred compensationfrom 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.
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 calledmandatory 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.