In short, Carmen Segarra is the sort of person I admire. Still, I'm sorry to say, she is wrong. Somehow in the course of her considerable education and extensive experience, she has managed to miss the forest for the trees.
The first thing she seems to miss is that the Federal Reserve cannot and does not supervise banks. What it does do is manage perceptions. The continued operation of the banking system depends almost entirely on perceptions. If people believe the banks are safe, they are safe. If people believe they are not safe, then they're not safe. What offended Segarra most, it seems, was when her bosses tried to get her to pay more attention to perceptions and not worry so much about substance. To an even greater degree than other things in life, the banking system depends mostly on what people believe about it rather than what it "is". To some extent, of course, the perception is based on substance, but not very much. The largest banks currently have an equity cushion of around 1%. Even if they had an equity cushion of 10%, it would hardly matter once people decide to run for the exits, which they do from time to time with very little reason. No one understands the banking system, not the Fed, not bank managers, not the shareholders, and certainly not depositors.
Second, Segarra imagined that it was her job to help prevent the next financial crisis, when in fact the Fed has no power to prevent the next financial crisis, no one does. The next financial crisis, when it comes, will happen when it happens. She is described as someone who is like the child who says the emperor has no clothes. Well, so far as the banking system is concerned, the emperor in fact has no clothes, but until some misguided person goes around worrying people about it, everything is fine.
Third, her main push against Goldman seems to be that it lacks a policy regarding conflicts of interest. The Fed requires such a policy, and she says Goldman didn't have one. Goldman is perhaps being more honest in this regard than it needs to be. It's not possible to function as a large bank without engaging in conflicts of interest. Goldman's policy regarding conflicts of interest can possibly be paraphrased as, "we engage in conflicts of interest." Conflicts of interest are not illegal, though they must be disclosed to the parties, and I'm sure they are, and I'm equally sure the parties don't care to read the fine print about that or much of anything else either. Only the most hopelessly naive have any doubts about what Goldman does. Such people should know better than to play in that playground.
