Segarra believed that Goldman had more pressing compliance issues – such as whether executives had checked the backgrounds of the parties to the deal in the way required by anti-money laundering regulations.
Segarra had joined the New York Fed on Oct. 31, 2011, as it was gearing up for its new era overseeing the biggest and riskiest banks. She was part of a reorganization meant to put more expert examiners to the task.
In the past, examiners known as "relationship managers" had been stationed inside the banks. When they needed an in-depth review in a particular area, they would often call a risk specialist from that area to come do the examination for them.
In the new system, relationship managers would be redubbed "business-line specialists." They would spend more time trying to understand how the banks made money. The business-line specialists would report to the senior New York Fed person stationed inside the bank.
The risk specialists like Segarra would no longer be called in from outside. They, too, would be embedded inside the banks, with an open mandate to do continuous examinations in their particular area of expertise, everything from credit risk to Segarra's specialty of legal and compliance. They would have their own risk-specialist bosses but would also be expected to answer to the person in charge at the bank, the same manager of the business-line specialists.
In Goldman's case, that was Silva.
Shortly after the Santander transaction closed, Segarra notified her own risk-specialist bosses that Silva was concerned. They told her to look into the deal. She met with Silva to tell him the news, but he had some of his own. The general counsel of the New York Fed had "reined me in," he told Segarra. Silva did not refer by name to Tom Baxter, the New York Fed's general counsel, but said: "I was all fired up, and he doesn't want me getting the Fed to assert powers it doesn't have."
This conversation occurred the day before the New York Fed team met with Goldman officials to learn about the inner workings of the deal.
From the recordings, it's not spelled out exactly what troubled the general counsel. But they make clear that higher-ups felt they had no authority to nix the Santander deal simply because Fed officials didn't think Goldman "should" do it.
Segarra told Silva she understood but felt that if they looked, they'd likely find holes. Silva repeated himself. "Well, yes, but it is actually also the case that the general counsel reined me in a bit on that," he reminded Segarra.
The following day, the New York Fed team gathered before their meeting with Goldman. Silva outlined his concerns without mentioning the general counsel's admonishment. He said he thought the deal was "legal but shady."
"I'd like these guys to come away from this meeting confused as to what we think about it," he told the team. "I want to keep them nervous."
As requested, Segarra had dug further into the transaction and found something unusual: a clause that seemed to require Goldman to alert the New York Fed about the terms and receive a "no objection."
This appeared to pique Silva's interest. "The one thing I know as a lawyer that they never got from me was a no objection," he said at the pre-meeting. He rallied his team to look into all aspects of the deal. If they would "poke with our usual poker faces," Silva said, maybe they would "find something even shadier."
But what loomed as a showdown ended up fizzling. In the meeting with Goldman, an executive said the "no objection" clause was for the firm's benefit and not meant to obligate Goldman to get approval. Rather than press the point, regulators moved on.
Afterward, the New York Fed staffers huddled again on their floor at the bank. The fact-finding process had only just started. In the meeting, Goldman had promised to get back to the regulators with more information to answer some of their questions. Still, one of the Fed lawyers present at the post-meeting lauded Goldman's "thoroughness."
Another examiner said he worried that the team was pushing Goldman too hard.
"I think we don't want to discourage Goldman from disclosing these types of things in the future," he said. Instead, he suggested telling the bank, "Don't mistake our inquisitiveness, and our desire to understand more about the marketplace in general, as a criticism of you as a firm necessarily."
To Segarra, the "inquisitiveness" comment represented a fear of upsetting Goldman.
By law, the banks are required to provide information if the New York Fed asks for it. Moreover, Goldman itself had brought the Santander deal to the regulators' attention.
Beim's report identified deference as a serious problem. In an interview, he explained that some of this behavior could be chalked up to a natural tendency to want to maintain good relations with people you see every day. The danger, Beim noted, is that it can morph into regulatory capture. To prevent it, the New York Fed typically tries to move examiners every few years.
Over the ensuing months, the Fed team at Goldman debated how to demonstrate their displeasure with Goldman over the Santander deal. The option with the most interest was to send a letter saying the Fed had concerns, but without forcing Goldman to do anything about them.
The only downside, said one Fed official on a recording in late January 2012, was that Goldman would just ignore them.
"We're not obligating them to do anything necessarily, but it could very effectively get a reaction and change some behavior for future transactions," one team member said.
In the same recorded meeting, Segarra pointed out that Goldman might not have done the anti-money laundering checks that Fed guidance outlines for deals like these. If so, the team might be able to do more than just send a letter, she said. The group ignored her.
It's not clear from the recordings if the letter was ever sent.
Silva took an optimistic view in the meeting. The Fed's interest got the bank's attention, he said, and senior Goldman executives had apologized to him for the way the Fed had learned about the deal. "I guarantee they'll think twice about the next one, because by putting them through their paces, and having that large Fed crowd come in, you know we, I fussed at 'em pretty good," he said. "They were very, very nervous."
Segarra had worked previously at Citigroup, MBNA and Société Générale. She was accustomed to meetings that ended with specific action items.
At the Fed, simply having a meeting was often seen as akin to action, she said in an interview. "It's like the information is discussed, and then it just ends up in like a vacuum, floating on air, not acted upon."
Beim said he found the same dynamic at work in the lead up to the financial crisis. Fed officials noticed the accumulating risk in the system. "There were lengthy presentations on subjects like that," Beim said. "It's just that none of those meetings ever ended with anyone saying, 'And therefore let's take the following steps right now.'"
The New York Fed's post-crisis reorganization didn't resolve longstanding tensions between its examiner corps. In fact, by empowering risk specialists, it may have exacerbated them.
Beim had highlighted conflicts between the two examiner groups in his report. "Risk teams ... often feel that the Relationship teams become gatekeepers at their banks, seeking to control access to their institutions," he wrote. Other examiners complained in the report that relationship managers "were too deferential to bank management."
