The Fed isn’t a cop on the beat on Wall Street, Federal Reserve Bank of New York President William Dudley said Friday.
Instead, “I think of it more like a fire warden: Make sure the institution is run well, so that it’s not going to catch on fire and burn down,” Dudley said.
The comments, delivered during a Senate hearing inquiring into whether financial regulators are too close to the banks they supervise, are sure to come back to haunt Dudley.
During his trip to Capitol Hill, Dudley sought to allay fears that his powerful office was captured or unduly influenced by big banks.
But the few senators who showed up to the hearing with the Senate out of session made it clear that they wanted him to be the cop on the beat and that he was falling short.
Asserting that regulators weren’t aggressive enough in overseeing banks, Sen. Elizabeth Warren, D-Mass., said “change has to come from the top,” and warned that “either you need to fix it, Mr. Dudley, or we need to get someone who will.”
As president of the New York Fed, Dudley has special authority over some of the biggest banks in the world and within the Federal Reserve System.
In recent months, media reports have raised questions about the New York Fed’s willingness to enforce regulations on banks. In September, news broke about a whistleblower with secret recordings of New York Fed examiners appearing to demonstrate reluctance to challenge Goldman Sachs about potentially questionable deals and conflicts of interests.
Those reports led liberal Ohio Democrat Sherrod Brown to call the hearing before the Banking Committee subcommittee he heads. With the whistleblower, Carmen Segarra, present in the audience as Dudley testified, Brown warned that “the financial crisis was brought out as much by timidity and capture on the part of regulators and Congress as it was greed on the part of Wall Street.”
Throughout the detailed questioning, Dudley asserted that the New York Fed had not been too deferential to Goldman Sachs and said regulators have made the financial system much better regulated and capitalized.
“We should be judged based on where the banking system is today compared to where it was six years ago,” Dudley, a former Goldman Sachs employee, told lawmakers.
But his defense of the New York Fed and commitments to improving the attitudes of regulators were viewed skeptically by the liberal senators on hand for the hearing.
Of the Fed’s attitude toward Wall Street, Sen. Jeff Merkley of Oregon said the “polite version would be to say it’s passive or asleep.”
In recent weeks, the New York Fed has been involved in controversies beyond the Segarra tapes. In particular, an inspector general report found that it knew of, but failed to act on, outsized risks at a JPMorgan Chase unit that later was responsible for the 2012 “London Whale” trade that involved billions in losses and led to criminal investigations. Banks supervised by the New York Fed were also at the center of a report released Wednesday by Sen. Carl Levin, D-Mich., that found that they were exposed to enormous risks and manipulated prices through their ownership of mines, warehouses and transportation of commodities.
Dudley said Friday that his agency prioritized the fallout from the financial crisis in 2009 and didn’t have the resources to address the problems that led to the London Whale.
He took a hard line on banks’ commodities businesses. If they manipulate prices, he said, “they should be prosecuted for that.” He added that “we do have to be concerned about commodities activities that expose banks to very large losses.”
