After seven months of investigating Goldman Sachs' legal and compliance divisions, former NYFed examiner Carmen Segarra found numerous conflicts of interest and breach of client ethics (specifically related to three transactions - Solyndra, Capmark, and the El Paso / Kinder Morgan deal) that she believed warranted a downgrade of Goldman's regulatory rating. Her bosses were not happy, concerned that this action would hurt Goldman's ability to do business, and, she alleges, they urged her to change her position. She refused, and as Reuters reports, she was fired and escorted from the building. “I was just documenting what Goldman was doing,” she said. “If I was not able to push through something that obvious, the [NY Fed] certainly won’t be capable of supervising banks when even more serious issues arise.”

Via Reuters,

A former senior bank examiner at the Federal Reserve Bank of New York filed a wrongful termination lawsuit on Thursday, saying she was fired after refusing to alter a critical examination of Goldman Sachs Group Inc. The former employee, Carmen Segarra, said that in her seven months of examining Goldman's legal and compliance divisions, she found the bank did not have policies to prevent conflicts of interest as required by regulation, a conclusion that might have caused a downgrade of the Wall Street bank's regulatory rating. As a result of Segarra's findings, the New York Fed's Legal Compliance and Risk team voted to downgrade Goldman's annual rating pertaining to policies and procedures, according to the lawsuit filed in federal court in New York. It is not clear whether the downgrade occurred, but according to the lawsuit, the threat of one startled Michael Silva, who oversees the New York Fed's relationship with Goldman, and Silva's deputy, Michael Koh. The two officials were concerned that a downgrade could cause clients to stop doing business with the Wall Street bank, the lawsuit said. ... Segarra was assigned to Goldman's legal and compliance divisions from October 2011 until May 2012, and looked into three controversial transactions related to Solyndra, Capmark and the merger of El Paso and Kinder Morgan. At that point, Kim, Silva and Koh fired her and had her escorted from the building by security guards after weeks of disputes and pressure to change her examination findings, the lawsuit said.

Via The Washington Post,

Goldman had past problems with conflicts. A year earlier, the bank had received a drubbing from the Securities and Exchange Commission and a Senate subcommittee over conflicts related to a mortgage transaction the bank constructed called Abacus. The SEC imposed a $550 million fine on Goldman for the deal. Segarra was instructed specifically to assess Goldman’s conflict-of-interest policies, including how they worked in a merger between two energy companies: El Paso Corp. and Kinder Morgan. ... Goldman did provide documents showing 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 improper information sharing. Segarra said Goldman seating charts showed 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. On multiple occasions during Segarra’s examination, Goldman executives acknowledged that the bank did not have a firmwide conflict-of-interest policy, she said. ... On March 21, 2012, Segarra presented her conclusion that Goldman lacked an acceptable policy on conflicts to her group of specialists from the other too-big-to-fail banks. ... A summary sheet from the group’s meeting recommended downgrading Goldman from “satisfactory” to “fair” for policies and procedures, the equivalent of a “C” letter grade. ... As the Goldman review moved up the Fed’s supervisory chain, however, Segarra said she began to get pushback. ... “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.”

Perhaps one indemnifying issue here is that whereas Goldman has indeed chronically and blatantly transgressed on numerous occasions when it comes to the abuse of its clients, and generally breaching its fiduciary duties, Segarra's description of the internal Chinese wall within the Goldman i-banking division sounds rather conventional and ordinary, and as for a conflict of interest policy - which banks actually really has one? To be sure, there are far greater misdeed for which Goldman can be held accountable, so in some ways the focal point of her complaint is not very strong.

Still, as everyone knows, both Bill Dudley and Stephen Friedman used to be at Goldman, and as we noted Dudley and Goldman chief economist Jan Hatzius periodically did and still meet to discuss "events" at the Pound and Pense.

So while her allegations may be non-definitive, and her wrongfful termination suit is ultimately dropped, there is hope this opens up an inquiry into the close relationship between Goldman and the NY Fed. Alas, since the judicial branch is also under the control of the two abovementioned entities, we very much doubt it.

Full suit below: