New York Fed Is Not "Cop On The Beat," But "Fire Warden" Says Dudley

The New York Fed views its role as one of ensuring the security of the large banks its regulates and not as a regulator charged with uncovering wrongdoing.

“I don’t think our primary purpose as supervisors is a cop on the beat,” New York Fed President William Dudley said in testimony to the Senate Banking Committee today. The testimony was attended only by Democratic senators. The New York Fed’s primary objective is “ensuring the safety and soundness of the institutions that we supervise.”

Dudley’s testimony on Wall Street crime

In prepared remarks, Dudley started his testimony with a strong statement on Wall Street crime: “Earlier this year, we assisted in consigning the concept of ‘too big to jail‘ to history when Credit Suisse Group AG (ADR) (NYSE:CS) and BNP Paribas SA (EPA:BNP) (OTCMKTS:BNPQY) pleaded guilty to criminal charges.”

New York Fed Is Not "Cop On The Beat," But "Fire Warden" Says Dudley

However, under questioning from Senator Jeff Merkley (D-OR), Dudley said he didn’t know how many bankers went to jail as a result of the Credit Suisse Group AG (ADR) (NYSE:CS) and BNP Paribas SA (EPA:BNP) (OTCMKTS:BNPQY) criminal issues. “The answer is zero,” Merkley said, noting that it was a Senate investigation that led to the criminal charges, not anything that the primary regulator provided. Dudley defended the New York Fed by saying it was difficult for the bank regulator to know what was going on in a foreign bank. Merkley didn’t buy this excuse, wondering out loud why it was a Senate investigation discovered the wrongdoing and reported it but not the front-line regulator.

Dudley appeared not to think investigating the banks for criminal activity was his job. He correctly asserted that it was enforcement agencies such as the Department of Justice that was responsible for criminal punishment, but neglected to discuss that the convention is for the front-line regulator to unearth wrongdoing and make a recommendation for enforcement.

Dudley refers to his job as a fire warden

Dudley didn’t view his job as much as an investigator, rather referring to his job as a “fire warden,” indicating that the New York Fed viewed its role as handling a fire after it was publically discovered.

This led to a frustrated Sen. Elizabeth Warren questioning if Dudley listened to the secret recordings of former New York Fed employee turned whistle blower Carmen Segarra, reported by NPR and Pro Publica. The tapes showed senior New York Federal Reserve executives telling lower level regulators to back off investigations of Goldman Sachs. Dudley appeared to dismiss the tapes, saying he couldn’t comment unless he listened to all 46 hours of the recordings. When pressed by Warren about why there weren’t more independent people like Segarra at the Fed, Dudley said “We want people who speak up, but we also want people who are fact based.”

When asked by Sen. Sherrod Brown (D-OH) about how a regional Fed president such as Dudley was appointed – noting that even people in Congress are unaware how the process worked – Dudley himself appeared not to provide a clear definition of how the appointment process worked himself, unsure of how those who appointed him were themselves appointed. As reported in ValueWalk, there is a move in Congress to have the U.S. President appoint the president of the New York Federal Reserve and have that person approved by the Senate in a fashion similar to other government nominees.

“You need to fix (the problems at the New York Fed) or we need to get someone who will,” Sen. Warren told Dudley.

After Dudley spoke, several academics testified about proposals to improve the regulatory capture situation at the New York Fed, but Dudley and all the Fed employees had left the room after his testimony, a face noted by Sen. Brown.


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