Promoted by Steven D.

Sounds kinky.  And it is.  But it’s bedding for money instead of sex.

ProPublica and This American Life released an important story this week by Jake Bernstein.  The ProPublica written story is Inside the New York Fed: Secret Recordings and a Culture Clash and the audio version is The Secret Recordings of Carmen Segarra.  The audio presentation structure of the story may be slightly better than the written report, but the latter includes important information not covered in the audio version.  Thus, the fullest appreciation of the story is gained by reading and listening to both versions.

Cont. below the fold.
What’s not mentioned is that the culture of the Federal Reserve that is cited as a reason why the examiners failed to thwart the financial meltdown isn’t unique to the Fed.  It’s exactly the same culture that led to the demise of Arthur Andersen and Enron.  The same culture that led to the bond ratings agencies to assign investment grade ratings to the various forms of mortgage backed securities and derivatives.  The same culture that put AMBAC into Chaper 11 bankruptcy and has left MBIA reeling.  Likely only slightly different from the culture at the SEC, FDIC, Fannie Mae, and Freddie Mac.  From all reports and actions to date, something similar seems to have infected the financial fraud unit of the Justice Department.  And it’s the same culture that has been embraced by all levels of the MSM.  IOW, the Walter Cronkites are extinct.

With such rotten core cultures in US financial regulatory  and affiliated financial oversight institutions, how did the US financial community operate for well for so long?  Roughly from the mid-1930s until 2008.  The answer is both simple and opaque.  The culture changed.  And the change was so gradual that it was difficult to detect.  Except by those that lived and breathed the prior culture, almost all of whom had retired and/or died by the time the “new” culture became endemic.  Their successors, like Michael Silva in Bernstein’s story, may have been trained in the technical details but never experienced that within the prior culture.  Segarra is like a throw-back.  Beating her head against a cultural wall that won’t budge.  How well I know that.  Yet, unlike Segarra, I had the privilege of being there before schmoozing dominated.

Bill was a Sr. VP.  A naturally gifted schmoozer.  Yet, in a meeting with his counterparts at a large bank that had had a long-standing, perhaps a hundred years, business relationship with his employer, he didn’t mince his words.  He said, “X is the worst bank in California.”  He followed that up with, “We’re out of here.”  Bill knew when to trust his subordinate analysts.  X bank died seven years later.  Three years after Bill had retired with forty-one years at one company.

Words that David Bein (the Columbia finance professor hired to review the FED) would have resonated with Bill.

That meant hiring “out-of-the-box thinkers,” even at the risk of getting “disruptive personalities,” the report said. It called for expert examiners who would be contrarian, ask difficult questions and challenge the prevailing orthodoxy. Managers should add categories like “willingness to speak up” and “willingness to contradict me” to annual employee evaluations. And senior Fed managers had to take the lead.

Bill would have reached down and pulled someone like Segarra up and instead of firing her, would have said, “Way to go!”   Then would have told those that had given Segarra flack to apologize to her.  

He wasn’t perfect.  On one team, I and my colleagues had to seriously consider the possibility that we’d receive pink slips for refusing to entertain further a deal that Bill was under pressure from the CEO to approve.  (A McKinsey & Co. deal that prefigured the GS-Banco Santander deal with conflict of interest but was extremely high risk for our employer.  While never fully defined, the subsequent lawsuits for one company that got suckered into it were in the hundreds of millions of dollars.)  Bill didn’t even fire me when after months of vacillation, I informed him that his pet project had turned into a POS.  He reassigned me and the project continued to rack up sunk costs for several more years before it was killed off.

Bill’s direct report AVPs followed his lead.  25% schmooze and 75% technically proficient.  The schmooze component was less for their subordinates.  What was critical to our success and we depended on was that there was virtually zero schmooze component to the work of  bank regulators, bond rating companies,  SEC, and CPAs.  That schmoozers become losers.  Unless they become TBTF.