Say it’s Summer 2009—pretty much the miasmic trough of the greatest economic meltdown of our age, as well as the point of greatest public interest in what will come of the federal government’s efforts to hold the financial industry accountable for the devastation it has wrought. Say you’re the recently installed president of the New York Fed—succeeding the exceedingly industry-friendly Timothy Geithner, who, in one of a series of astoundingly clubfooted miscues from the fledgling Obama White House, has recently been named Secretary of the Treasury.
Who do you, as the inheritor of Geithner’s flickering regulatory torch, cite as an authority in your efforts to motivate your crew of battered and bewildered financial industry regulators?
Maybe Teddy Roosevelt, and his battery of Progressive-era exhortations to rein in the “malefactors of great wealth”? Or Ferdinand Pecora, the congressional attorney who captained the famous inquiry into the causes of the 1929 stock market crash and the crippling depression that followed it? Or maybe just the wan but respectable cautions of former Fed chair Paul Volker, who was at the time trying to restore some desperately needed substance to Congress’s half-hearted efforts to bring Wall Street under something faintly resembling actual regulatory discipline?
Well, if you’re Bill Dudley, the answer is emphatically “none of the above.”
Dudley, in the grand tradition of revolving-door regulatory appointments, was the former chief economist for Goldman Sachs, arguably the most exuberantly bottom-feeding investment-bank titan of our purblind age—and so, naturally, he directed his troops to heed the sage executive counsel of Goldman CEO Lloyd Blankfein.
“People ask me, ‘Well, why is Goldman so successful?’” Dudley explained in a 2009 “town hall” meeting of Fed employees. “It’s not because they have the right people in the right places.” He then paused, in an awkward flourish, to joke, “No one’s activated the chip in my head yet.” But seriously folks: “It’s because they have a very good culture. And we have a very good culture here, too.” And then the money quote:
One thing that Lloyd Blankfein always tries to make clear at Goldman is that there’s a very thin line between confidence and arrogance. We want to be confident. We want to have faith that we have ability. We want to be brave. We want to be pro-active. But we don’t want to be arrogant. Arrogance is really the beginning of the end.
You can listen to Dudley’s motivational oration here:
As the Fed-connected source who recently drew this circa 2009 Blankfein-osculating performance to our attention notes, “Goldman’s culture is framed as aspirational” in Dudley’s remarks. “There’s an underlying ‘we can be like Goldman’ message here as the employees are regaled with the wisdom of Lloyd Blankfein.”
Of course, when the wider world is paying attention, Dudley, like any dutiful Obama regulator, can mouth stirring platitudes about transparency, accountability and whatnot. In a workshop this past October on reforming the “culture” of the financial industry, he preached that
a core element of any firm’s culture and mission must be a respect for law….[T]hose who self-report [legal and ethical abuses] in a timely way must be treated preferentially, compared to those that drag their feet and whose bad behaviors are only uncovered by enforcement investigations.
But Dudley’s actual track record at the New York Fed tells a starkly different story—one in which quiet foot-draggers get ahead, and aggressive reporters of shady activities are summarily shitcanned.
As This American Life documented in excruciating detail last year, New York Fed investigator Carmen Segarra was detailed to probe operations at Goldman in 2011. When she started hearing alarming things—such as an aside from one senior Goldman official explaining that, once a bank client was wealthy enough, certain consumer laws simply didn’t apply to his or her account—she sensibly raised alarms with her Fed colleagues. The reply she got was also, uhm, bracing:
This colleague at the Fed basically said, you know, ‘Oh, that point? Oh, you didn’t hear that.’… I was floored. It was the moment when I realized, Oh, this is what pushback looks like.
Segarra then proceeded to record all her Goldman examinations. A good thing, too, because in short order, Segarra’s supervisor, Mike Silva, reportedly sat her down to chastise her for her over-diligent habits of oversight: “He said, you know, credibility at the Fed is about subtleties and perceptions, as opposed to reality.” And lest that didn’t drive the point home with sufficient force, she went on: “He said the Fed takes most seriously those employees which are the most quiet ones. And that it was important essentially that I understand this, because otherwise I would be frozen out.”
Senior interference continued to overtake Segarra’s efforts to do her job until, after one particularly abrasive dust-ups with the do-nothing Goldman supervisors, another senior Fed official took her aside for this little tutorial:
Have a sense of humility, right? Because a lot of the things you say, and this is the way you’re coming across, I think I know you well enough that that’s not what you’re saying, right? But if I were to be a new person, I were to say Carmen, you’re being very arrogant. Right?
Riiiight. Things went on this way until mid-2012, when Segarra indecorously kept insisting on what she knew to be true—that Goldman had no serious in-house policy to identify and remedy conflicts of interests. This was simply too much for Mike “Perception Is Everything” Silva, and he fired her.
She went on, in her “arrogant” way, to sue the New York Fed; her complaint was dismissed on statutory grounds by the first judge to hear it, but she’s now in the process of appealing his decision. In any case, the larger moral here is unmistakable. As Lloyd Blankfein and his acolyte Bill Dudley keep insisting, managerial culture really does matter.