On September 26th, This American Life and Propublica revealed they had obtained 46 hours of secret tapes recorded inside the Federal Reserve Bank of New York by then-examiner Carmen Segarra. The tapes lay bare the NY Fed showing extreme deference to Goldman Sachs, even as they investigate a “shady” Goldman deal. The tapes also reveal Segarra’s attempts to document the lack of a conflict of interest policy at Goldman, while her fellow employees insist she tone the report down.

Segarra was ultimately fired by the NY Fed. She alleges that her firing was retaliation for refusing to soften her Goldman report. For their part, the New York Fed has maintained that the allegations by Ms. Segarra are inaccurate, and they note that Ms. Segarra lost her initial court case alleging wrongful termination (Ms. Segarra is appealing the decision).

But even if we ignore the facts surrounding Ms. Segarra’s termination, no one would dispute that the tapes humiliate the Fed, and fortify the public’s already dim view of the backbone of financial regulators.

In the wake of this bombshell story – and in the face of the Fed’s continued intransigence – it’s important to contextualize Ms. Segarra’s story and remind the public of the Fed’s long history of ignoring and abetting Wall Street failure. Here’s a brief look back.

Secretly propping up the banks

Perhaps the most egregious example of the Federal Reserve pursuing its mission of maintaining the “safety and soundness of the banking system” at any cost is their secret aid deployed in the heat of the financial crisis. From 2007–2010, the Fed provided loans and other liquidity programs not just to failing U.S. banks, but also to foreign-owned banks, and non-financial firms like Caterpillar and Toyota.

The Fed’s emergency assistance to troubled institutions peaked on December 5th, 2008, at $1.2 trillion

These programs were separate from the $700 billion TARP bailout, and its beneficiaries were undisclosed to Congress at the time. We only know the full details of these programs because of the diligence of the late Mark Pittman, and the rest of the Bloomberg News team.

The Fed fought hard to keep secret just how unstable hundreds of firms were during the worst parts of the financial crisis. When Bloomberg News filed a Freedom of Information Act (FOIA) request to find out which firms the Fed was loaning money to through these programs, the Fed refused to disclose it. They argued most relevant documents were at the NY Fed, who they alleged wasn’t subject to FOIA law. So Bloomberg LP sued, prevailed in court, and carefully compiled their findings in 2011, including a stunning visualization.

Screenshot of Bloomberg’s visualization of the The Fed’s Secret Liquidity Lifelines

The Fed’s secrecy during the crisis greatly benefited the biggest banks, enabling them to lie about their financial condition. As Bob Ivry, Bradley Keoun and Phil Kuntz noted for Bloomberg:

“On Nov. 26, 2008, then-Bank of America (BAC) Corp. Chief Executive Officer Kenneth D. Lewis wrote to shareholders that he headed “one of the strongest and most stable major banks in the world.” He didn’t say that his Charlotte, North Carolina-based firm owed the central bank $86 billion that day.”

What’s more, former Democratic Senator Ted Kauffman told Bloomberg that if Congress had known the extent of the help the Fed was providing, “he would have been able to line up more support for breaking up the biggest banks.”

Ignoring Market Manipulation

The Fed’s approach to covering for banks is not always as overt as providing them with quick cash in times of crisis. Sometimes, the Fed just looks the other way when suspicious activity occurs.

As Shahien Nasiripour reported for FT, the New York Fed knew banks may be manipulating the benchmark London Interbank Offered Rate (LIBOR) as early as 2008. Despite warnings from multiple employees at the time, the NY Fed did not act beyond then president Tim Geithner sending a milquetoast set of recommendations to Bank of England Governor Mervyn King.

And as former Inspector General for the TARP program Neal Barofsky noted, Geithner effectively co-signed the LIBOR rigging by using the faulty rates in the Fed’s AIG bailout:

Sweeping the Foreclosure Crisis Under the Rug

Image by Christopher Sessums, Creative Commons.

In order to answer the question “what went wrong during the foreclosure crisis?” the Fed undertook an exercise in 2011 with another banking regulator, the Office of the Comptroller for the Currency (OCC), called the Independent Foreclosure Review (IFR). The review was also meant to find out which foreclosures from 2009–2010 had been fraudulent. Instead, the review became just another exercise in sweeping bank secrets under the rug.

Flawed from the start, banks were allowed to hire their own consultants to conduct the reviews. Many, including Francine McKenna, highlighted the conflicts of interest inherent in this arrangement:

“Allowing the banks to choose their own judge, jury, and jailer presents almost untenable conflicts of interest. All of the consulting firms that were initially being considered to do the work serve the banks already. The banks, and their mortgage servicing operations, are existing or prospective clients.”

What’s worse, instead of seeing the process through to the end, the review was abruptly ended in 2013 with a $8.5 billion settlement. MSNBC’s All in With Chris dubbed it “a nationwide crimescene.”

The Fed and the OCC tried to downplay the harm to borrowers, with the OCC claiming that mortgage servicers made errors only 4.2% of the time. But news reports found those numbers to be bogus — Wells Fargo, for example, had up to an 80% error rate in foreclosure files reviewed. And an investigation into the review by the Government Accountability Office found a slew of problems with the review, including the fact that the 4.2% error rate was essentially made up. As I wrote for The Nation:

“The OCC and the Fed allowed the banks’ captured consultants to define what constituted “harm” to the borrower — meaning that not only could findings of harm be minimized, but also that harm rates across the banks could never be aggregated to give a full picture of wrongdoing. Thus, the 4.2 percent error rate the OCC reported was compiled by mashing together incompatible data points, creating a statistic with no basis in reality.”

To add insult to injury, in the final settlement with wronged borrowers, the payout amounts to homeowners who lost their home at foreclosure were grossly inadequate: if you were granted a loan modification by your bank, but they foreclosed on you anyway, you got $500.

If you you did nothing wrong and were not in default, but were illegally foreclosed on anyway, you got a paltry $5,000 (but not your home back).

To demonstrate the extent of their inadequacy, in 2013 I created the tumblr What You Can Buy For Having Your House Stolen.