The Bank Spot

Views, muse and the occasional brilliant insight about banks and banking

Will 2015 be a Banner Year for Bank M&A Deals?

The year 2014 was a good vintage for bank merger and acquisition deals. According to SNL Financial, there were 288 healthy bank acquisitions last year, which was a big improvement over 2013, when there were 224. So how many are we likely to see in 2015? I think the bank M&A market this year could be even stronger.

I believe the biggest factor that will propel deal flow this year is a continuation of the low interest rate environment that has driven the industry’s new interest margin (which is the difference between a bank’s cost of funds and what it makes off of loans or earns from its securities portfolio) to nearly its lowest point in 36 years.  In a presentation today at Bank Director’s Acquire or Be Acquired conference in Scottsdale, Arizona, John Duffy, vice chairman at the investment banking firm Keefe Bruyette & Woods, put up a chart showing that since 2004 the industry’s NIM has been well below the historical average going back to 1978. Over this 11-year stretch, the only year worse than last year was 2004.

It is very hard for a bank to make money when interest rates are this low, and it is unclear when they will start heading back up. I think generally most economists and capital market observers are expecting the Federal Reserve to begin raising interest rates through its monetary policy apparatus sometime this year. But any rate tightening by the Fed is likely to be gradual and probably won’t have a significant impact on the industry’s profitability at first. A sharp increase in rates could strangle an economic recovery that seems to be gaining steam in the United Sates, which would hurt banks. And there has also been some talk about the possibility of deflation thanks to the steep drop in oil prices and raising rates during a deflationary period doesn’t seem to make sense.

What is the connection between low interest rates, margin pressure and bank M&A? Simply put, doing an acquisition might the only way that many banks will be able to improve their profitability. And with no clear end in sight to their NIM misery, the pressure to do deals will only increase.

Transaction volume this year might get off to a slow start since the decline in oil prices, combined with the ongoing economic crisis in the Eurozone, has created some volatility in U.S. stock markets and it might take some time for valuations to stabilize. Most bank acquisitions are financed all or in part with stock, so this volatility could make it harder to price deals. But I expect that the profit pressure from low interest rates – which in all likelihood will continue to stay low — will trump any other concerns and be the catalyst behind a lot of deals this year. My prediction for 2015 is upwards of 375 deals – which would be the most since there were 475 deals in 1998. A bold prediction for sure, but I’m sticking to it.

Ciao from Arizona.

The Bull is Back

In a few days I will be heading out to Bank Director’s annual Acquire or Be Acquired conference, which this year is being held at The Phoenician resort hotel in Scottsdale, Arizona. This will be our 21st AOBA, and the event has become an excellent barometer for measuring the strength of the bank merger and acquisition market. For a full preview of the conference’s upcoming highlights, you should definitely go to Bank Director President Al Dominick’s blog at AboutThatRatio.com.

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Based on the activity that occurred in 2014, I would say that it’s once again a bull market for bank M&A. According to SNL Financial, there were 288 acquisitions of healthy banks and thrifts last year, for an average price of 140% of tangible book value. That’s a big jump from 2013, when there were 224 deals for an average price of 124% of tangible book value. It pains me to say that (ahem) last year’s deal flow was also quite a bit higher than I predicted in this Spot, and also in a video I taped at last year’s conference.  I predicted then that we would see 225 to 250 deals in 2014 and as many as 275 deals in 2015.

As an aside, let me say that I never bet on football games despite being an avid fan, and this is why.

Obviously the M&A market performed much better last year than I expected. So what drove the strong deal flow? First, I would point to a significant improvement in loan quality, which three or four years ago was probably the single biggest reason why the market dropped to a 20-year low of 109 deals in 2009. It is very difficult to price a bank acquisition when you’re in the downward leg of the credit cycle because a target’s loan portfolio can look like a black hole. Loan quality has been improving industry-wide for the last couple of years, and 2014 might have been the tipping point when acquirers finally felt comfortable that loan quality had stabilized.

1Q 15 Cover

Another factor was a more accommodating stance on acquisitions by the regulators, who had pretty much clamped down on takeover activity for a few years after the financial crisis as a great many banks struggled to purge bad loans from their portfolios and raise capital. There seems to have been sea change in how the regulators are now approaching M&A, as we spell out in the 1st Quarter 2015 issue of Bank Director magazine, which will be in your mailbox in a couple of weeks. While the regulators have loosened their restrictions, the only banks that are permitted to play the M&A game these days are those with a strong compliance track record and a good relationship with their supervising agency.

A final driving force behind last year’s market resurgence is no doubt the slow but steady improvement in the U.S. economy. Banks are creatures of the economy, and when the economy does better so do they. A growing economy generally provides more opportunities for banks to lend money to businesses and consumers, and it’s easier to take on the risks of an acquisition with the wind of an economic expansion at your back.

The AOBA conference begins on Sunday January 25, and I will being posting videos and commentary from the event beginning on Sunday evening, and offer another prediction on the number of M&A deals that we’ll see in 20015, so don’t wander too far away from this Spot.

Ciao for now!

Breaking Up is Hard to Do

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J.P. Morgan would not be amused if he were alive today.

The megabank that everybody loves to pick on has been back in the news again, this time when a team of analysts at Goldman Sachs advocated last week the dismemberment of J.P. Morgan Chase & Co., which at $2.5 trillion is the largest bank in the country.

Goldman’s rationale for this is pretty simple, really. J.P. Morgan is an underperforming conglomerate whose whole is worth less than the sum of its parts. The bank’s stock has been trading at a 20% discount to smaller, more focused rivals. One reason for that disparity could be the likelihood that J.P. Morgan will have to raise an estimated $20 billion in capital to meet higher capital requirements for global systemically important banking organizations – or GSIBs – proposed by the Federal Reserve in December and expected to take effect in 2016. J.P. Morgan is one of eight U.S. banks that have been so designated — much to their collective displeasure, I’m sure. This is one club that no bank wants to be a member of.

Another reason why investors are leery of the stock could be a lingering hangover from the so-called London Whale debacle in 2012, when a derivatives trader (so-named the Whale because he liked to take huge bets with his trades) in the bank’s London-based Chief Investment Office racked up $6 billion in losses, giving one the distinct notion that J.P. Morgan had become Too Big To Manage. The bank has since taken steps to strengthen its risk management capability all the way up to the board level, but it remains one of the largest and most complex financial institutions in the world — and when used to modify the same noun, “large” and “complex” are two adjectives that many institutional investors shy away from.

We all know that megabanks have been under intense scrutiny since the financial crisis, J.P. Morgan included. There have been calls from them to be forcibly broken up, and the regulators have been focusing on their every twitch with the same intense scrutiny that a mongoose displays towards a cobra. Another bank that has been getting the same mongoose stare from the regulators – and also has been the focus of discussion by analysts as to whether it should be broken up if management can’t deliver stronger returns to investors — is $1.9-trillion asset Citigroup, the country’s third largest bank.

I have two problems with Goldman’s proposed restructuring for J.P. Morgan, which is to divide the bank into four units: consumer banking, commercial banking, investment banking and investment management. First, as the Goldman analysts themselves pointed out, there is a significant amount of execution risk in an undertaking like this. Pulling apart a complex organization like J.P. Morgan would be much more difficult than disassembling something more akin to, say, the 1980s-era Sears, Roebuck & Co.  that combined a traditional big box retailer with an insurance company (Allstate), stock broker (Dean Witter Reynolds), real estate broker (Coldwell Banker) and credit card (Discover). Those socks-to-stocks operating units weren’t nearly as integrated and co-dependent  as are J.P. Morgan’s four main operating subsidiaries, and pulling them apart would be much more complicated – more along the lines of separating co-joined twins who share a range of vital internal organs.

Spinning off J.P. Morgan’s investment banking arm into a standalone company would deprive it of the funding advantage of the consumer bank’s stable deposit base, although some are advocating that very policy as a way to eliminate the moral hazard of having people like the London Whale use insured deposits to make billion dollar bets. Of course, Lehman Brothers was also a standalone investment bank, and it was Lehman’s failure in 2008 that added fuel to a global financial conflagration that was already burning quite spectacularly. Lehman financed its operations through a combination of equity and debt capital, and when the company got into trouble its investors and creditors vanished like thieves in the night.

Presumably a new standalone investment bank would still be required to become a bank holding company – just like Goldman and Morgan Stanley, both of which sought refuge under the wings of the Federal Reserve during the crisis. This would at least permit it to borrow from the Fed during times of crisis, but it could also present the central bank with a serious dilemma when the next crisis occurs: prop it up as the lender of last resort, and stand accused of continuing the unpopular policy of Too Big To Fail, or let it go under (as it did with Lehman) and see what happens. And of course, we know what happened after Lehman cratered. I am probably in the minority, but I think that J.P. Morgan’s investment bank might pose less of a systemic risk to the U.S. economy as part of a large institution as it is now than as an independent company.

The other problem with Goldman’s proposal is that J.P. Morgan Chairman and CEO Jamie Dimon almost certainly hates the idea. This isn’t the first time that people have speculated about a breakup of his bank, and Dimon pointed out in his 2013 letter to shareholders that J.P. Morgan’s interdependent operating structure enabled it to generate $15 billion in revenue synergies and $3 billion in cost savings the year before.

More to the point, today’s company is largely a creature of Dimon’s making going back to July 2004 when he sold the old Bank One Corp. to J.P. Morgan Chase & Co. and became CEO of the combined company the following December. Dimon fought tooth and nail to retain the chairman’s title after the London Whale incident, when critics were arguing that J.P. Morgan’s board needed stronger leadership from an independent chairman. I can only imagine how hard he will fight to keep his company intact – no doubt with the stern approval of the legendary J.P. Morgan himself, wherever he is.

It’s More Than Just the Money

Which is more likely to attract talented executives to your bank, money or corporate culture?

When we asked that question in our 2014 Compensation Survey, I expected most of the respondents – the survey went to bank CEOs, other senior executives and outside directors – to pick money.

I was wrong.

Question:  Which factors do you believe make your bank attractive to potential hires at the executive level?

  • Corporate culture: 69%
  • Stability of the company: 53%
  • Career opportunity: 30%
  • Market leader: 19%
  • Compensation program: 13%

Granted, this question measured the opinion of employers rather than the attitudes of prospective new hires, but I still thought it was fascinating that from the perspective of the survey participants, employees place a substantially higher value on the quality of the work environment than the size of their paychecks. Unless the survey respondents were engaged in mass self-deception, I would say their perception is most likely an accurate reflection of reality. In a highly competitive industry that’s always on the lookout for talent – especially lenders who can help move the revenue needle – banks should have a pretty good idea of what it takes to attract quality employees.

The importance of culture was driven home to me this past week by  Scott Dueser, the chairman and CEO of First Financial Bankshares in Abilene, Texas, who gave the keynote address at Bank Director’s 2014 Bank Executive & Board Compensation Conference in Chicago. The title of Scott’s presentation was “It’s More Than Just the Money,” and I thought it was fascinating that he said virtually nothing about the bank’s business lines, markets or plans for acquisitions. Instead, he spoke at length about the company’s work environment and how its employees are trained, managed, empowered and recognized when they do something important. First Financial does provide its employees with competitive compensation programs, including profit sharing and widespread use of stock options throughout the company. But Scott clearly believes that First Financial’s culture is as big a retention tool as compensation.

First Financial is one of the top performing publicly-owned banks in the country, having won Bank Director’s 2014 Bank Performance Scorecard ranking for mid-sized banks. The bank also placed first in its asset size category in 2010, and since 2009 has never finished lower than third. This is a highly profitable and well-managed company, and yet the CEO places great importance on culture and the environment that First Financial provides for its employees. After his presentation I asked Scott why. Here is his explanation – and I am paraphrasing: First Financial prefers smaller markets like Abilene, Orange on the Texas-Louisiana border or a string of bedroom communities that sit outside the Dallas-Fort Worth Metroplex, to big cities like Dallas and Houston, because it can charge more. The fact that First Financial can charge more helps drive its profitability. However, the main reason why the bank can charge more is because it also provides great customer service. And you can’t provide great customer service if your employees hate their jobs, which is why First Financial places so much emphasis on training, career management, empowerment, recognition and, yes, compensation.

It’s probably an axiom that only happy employees can provide great customer service, just like the best milk comes from contended cows. So if customer service is one of your core business strategies, make sure your bank is providing an environment  where people enjoy coming to work every day and love what they do.

Ciao.

 

Best Practices of High Performing Boards, Part Two

Have you ever wondered what a board of directors actually does?

Watching a group of directors at work isn’t as exciting as, say, well…just about anything else you could think of. Have you ever watched a televised meeting of your city or county commission on the local public access channel? It’s not even as interesting as that because at least with those meetings – and here I am reaching w-a-y b-a-c-k into my memory of having covered (too) many of those as a fledgling staff writer for a small daily newspaper in Martins Ferry, Ohio – you never know when a gadfly will show up and want to speak.

And yet the work of the board is critical, and strong boards make a tremendous contribution to the success of their organizations. This is true in banking as in any other industry, and also in the nonprofit sector. Governance is a deliberative process in which a group of individuals talk, debate (sometimes argue) and make decisions that help guide the organization in its pursuit of certain goals. It might not make for compelling reality TV, but strong boards do many things that make a material difference.

In my last post I offered five of 10 best practices that I have seen in high performing boards, which were taken from a presentation that I made earlier this month to approximately 200 bank directors and CEOs at the CEO & Board University in Westborough, Massachusetts. Here are the remaining five.

Best practice #6 is to demonstrate an ongoing commitment to learning and education.

Most outside directors serving on a bank board face the challenge of learning a complicated industry on the fly because there’s usually no apprentice program. The mechanics of good governance are actually pretty straightforward and a smart person can pick them up pretty quickly. But banking is a complex business, in part because of regulation, but also because the economics are different than in most other industries. Ultimately, a director’s effectiveness will depend on how much they know about the business of banking. It is not the role of the board to run the company. But how can the board exercise its fiduciary duties to shareholders, or be a valuable resource to management, if its members don’t understand the businesses that the bank is in, or the regulatory issues that it faces?

Learning and education can be structured a couple of different ways. You can attend conferences, including those offered by Bank Director.  Some banks will have an outside advisor, or member of senior management, make a short presentation on some important topic at every board meeting. I don’t think that substitutes for a deeper learning experience, but it can be helpful. And it’s important that individual directors commit to studying on their own. It would be great if there was someone in the bank who understood the industry – including all of the critical issues — well enough that they could push out a monthly reading list.

This is asking a lot because most directors are very busy, but a board level commitment to ongoing education is important. Basic intelligence, life experience and sound judgment are important qualities for a director, but they can only take you so far. You need to know enough about the business of banking to have a meaningful dialogue with management, ask the questions that need to be asked and fulfill your fiduciary duties.

Best practice #7 is to understand your bank’s strategy and levers of profitability.

Strategy becomes very important in a tough business climate where the economy is working against you rather than for you. Strategy wasn’t as important in 2004, when the U.S. economy was booming and a strong housing market was leading the way, as it is today. Industries with excess capacity often see their products turned into commodities, which ultimately impacts their profitability. I think the only way out of the commodity pricing trap is through a strategy of differentiation where you create a unique value proposition that the customer is willing to pay more for. It is not the board’s job to set the strategy of the bank. That’s management’s job. But the board needs to understand it and have meaningful discussions with the management team when the bank’s strategic plan is being formalized and participate in that process. The board also needs to understand how the bank makes money and where those pockets of profitability are located within the organization.

Best practice #8 is to have a fundamental understanding of risk management.

One of the board’s most important roles is to build value when times are good and preserve value when times are bad. Risk management is how you preserve value during hard times. It has been a growing trend in recent years to establish a board level risk committee – and at larger banks, to hire a chief risk officer. The full board can delegate some of the governance responsibility for risk management to a risk committee – but it is still important that all directors be conversant with the concepts and principles of enterprise risk management. This is an area that the regulators have been focusing on more since the financial crisis – and they expect bank directors to understand it.

Two hundred and ninety-seven banks failed in 2009 and 2010 as a direct consequence of the financial crisis. I would willing to bet that a majority of those failures stemmed from decisions board and management made together that violated some principle of good risk management – probably credit risk, and most likely concentration risk along with it.

Best practice #9 is to understand the regulatory environment that your bank operates in and promote a strong compliance culture.

It’s certainly no secret that the regulatory environment has become much tougher since the crisis. The federal prudential regulators – the Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and Federal Reserve – as well as the Consumer Financial Protection Bureau can make a bank’s life very difficult if they choose to, so compliance has to be a top priority for the board.

Every board member should know what principal laws bank regulators are focused on – the Bank Secrecy Act and anti-money laundering requirements have been a big one of late — and whether or not the bank is in compliance with those. The board should also have a good feel for the recent trends in enforcement actions. There are occasions when the board or individual directors will have face-to-face contact with the bank’s primary regulator, as when they present the results of an examination. But even though most of the contact with the regulators will probably occur at the management level, the board is still responsible for setting the tone for regulatory compliance throughout the bank

Best practice #10 is to be aware of the world around you and how that is affecting your bank.

There are great changes taking place in the banking industry today, including the impact of mobile technology on the distribution of many bank products, the entry of large technology companies like Google and Apple into the payments sector and the historic demographic shift that is beginning to reshape the industry’s customer base as millennials become a much larger force in the U.S. economy.

Every bank — even a behemoth like JPMorgan Chase & Co. — is impacted by external events and trends. Much of the board’s work is inwardly focused – quarterly earnings, an announced acquisition, management or board succession issues, the annual shareholders meeting, year-end financials. But I think it’s important for directors to pay attention to how the industry is changing. This is actually something that the board is better equipped to do than management, which tends to be even more internally focused than most directors. Don’t allow yourselves to become too myopic.

Until next time, Ciao.

Best Practices of High Performing Boards, Part One

I recently gave a presentation to about 200 bank CEOs and directors at the CEO & Board University in Westborough, Massachusetts, an annual educational event put on by Wolf & Co., a regional accounting and consulting firm headquartered in Boston. The subject of my remarks was a list of best practices for high performing boards, and I thought I would share an abbreviated version of my remarks. I spoke for 55 minutes, which is hard work for a writer!

What follows is a list of behaviors and characteristics that I’ve noticed in high performing banks that we’ve either written about in Bank Director magazine, or have presented at one of our conferences. It’s not always obvious how a board of directors contributes to a company’s earnings performance or strategic accomplishments. Directors perform virtually all of their work behind the scenes and it’s hard to tell sometimes what they actually do. And yet I’ve come across very few high performing banks that didn’t seem to have the backing of a strong board – a better word than strong might be engaged – that was stocked with highly competent directors.

So here are my first five best practices for high performing boards.

Best practice #1 is to hire a high performance CEO.

Of all the things that boards do, this might be the most obvious – and yet it’s also the most important. A good CEO works closely with the board to develop a strategy that fits the bank’s market and has the potential to create a high level of profitability. They bring in good talent and do a good job of motivating and leading them. And they have the ability to execute the strategic plan and deliver what they said they will deliver. Having a high performance CEO doesn’t guarantee success, but I think it will be very hard to be a high performing bank without one.

Best practice #2 is a willingness to engage in the business of the board.

How thoroughly do your directors prepare before every board or committee meeting? Do they ask questions? Do they probe and ask more questions if they’re not satisfied with the answers? Do they participate in the meeting or simply observe? Are their heads in the game? I think it’s important that individual directors ask themselves why they’re on the board in the first place. Unless a director is also a large shareholder with a significant investment to protect, or happens to serve on the board of one of the four largest banks in the country and makes in excess of $250,000 a year, they’re probably not making a whole lot of money doing this. If a director is in it for the prestige, or because they think that serving on a bank board might benefit some other aspect of their life, then I would suggest there are better uses for their time. Most of the really good directors that I’ve had the pleasure of getting to know enjoy banking and think banks are important. They find intellectual stimulation in the challenges of trying to run a high performance institution. And they enjoy having the opportunity to work with a group of smart and successful people who all want the same thing, which is to build a great bank.

Best practice #3 is to understand what your bank is worth.

Banking is a numbers-driven business and there are various measurements of performance: Return on assets and tangible book value – and if you’re a stock corporation, return on equity and the price/earnings ratio. Investment bankers usually talk about what a bank is worth in the context of how much it could sell for if the board decided to sell. Boards are not obligated to sell the bank just because a potential buyer has expressed interest. But I think it’s important for even private companies to know how much monetary value a sale would create for its owners versus pursing its current strategy as an independent company. Having a clear understanding of your bank’s valuation is important even if you are not a prospective seller because it is a report card of how well the board and the CEO are doing at creating long-term economic value for the owners. There is no perfect metric for this. Tangible book value is an imperfect measurement because there are intangible “assets” beyond goodwill that it doesn’t capture — like the quality of customer relationships, or the strength of your brand. But if a bank’s tangible book value has been declining over a span of years, it’s probably a sign that the board and CEO aren’t doing their jobs.

Best practice #4 is to be independent and independently minded.

Nasdaq and the Dodd-Frank Act spell out a legal/regulatory definition of independence for outside directors, but I’m referring to something different. Irrespective of whether you bank is privately or publicly held, do the directors exercise their own judgment, with the courage to follow through on their convictions, even if it occasionally brings them in conflict with other board members? It can be uncomfortable to be the only person on the board who objects to a particular course of action, or asks the question that’s on everyone’s mind but no one else wants to articulate. But I think it’s important that every director be willing to do that if that’s where his or her judgment and conscience leads them. What I’m talking about here is the willingness to be unpopular, or engage in a level of constructive conflict, if a director believes there is an important principal at stake. Sometimes being an effective director requires a measure of courage. It could be that one director who voices their opposition to a decision the board might later regret, or forces the board to confront an issue that other directors would prefer to sweep under the rug, who ends up making a difference.

Best practice #5 is the board’s ability to achieve a degree of balance in its deliberations.

Active engagement and independence are important qualities for directors, but the governance process works best when it drives toward consensus and compromise. A board that is in constant turmoil because a director or group of directors needs to win every argument can’t be an effective governing body. Once a vote has been taken, it’s important that every director respects and supports the board’s decision. If an individual director ever reaches the point where they find that a lot of votes are going against them and they seem to have a fundamental disagreement with a majority of the board on issues that are important to them, or if there are philosophical differences that can’t be reconciled, then perhaps they should consider resigning. There are worse things than no longer serving on a board.

Next week I’ll post my second five best practices.

Until then, ciao.

Inside the Emerald City

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Of all the federal bank regulators, none have as much prestige or, frankly, mystic as the Federal Reserve. The Fed is our country’s central bank and manages the money supply primarily through the manipulation of interest rates, but it also plays an important supervisory role, working through its 12 district banks. Of those, none is more important than the Federal Reserve Bank of New York, partly because it implements the Federal Reserve Board’s monetary policy through its open market operations, which involves the buying and selling of U.S. government securities – but also because it supervises some of the country’s largest banks including JPMorgan Chase & Co., Citigroup, Morgan Stanley and Goldman Sachs.

The New York Fed is often described as the “first among equals” of the 12 district banks. Former Treasury Secretary Tim Geithner spent six years as president of the New York Fed before moving down to Washington. Geithner was one of a select group of wise men, along with former Fed Chairman Ben Bernanke and former Treasury Secretary Hank Paulson, who put together the rescue plan in the dark days of 2008 that ultimately saved the economy from Armageddon. The president of the New York Fed is important because within the bank regulatory community, the New York Fed is important.

The bank’s reputation has taken a hit following the publication of a lengthy story in ProPublica, a nonprofit website that specializes in investigative journalism. The piece, “Inside the New York Fed:  Secret Recordings and a Culture Clash,” focuses on a former compliance officer – Carmen Segarra – who was fired after she clashed with her boss over a matter involving Goldman Sachs. (A similar audio version ran on This American Life, a weekly public radio show that airs on National Public Radio.) The allegations that Segarra makes are disturbing and I would encourage everyone to either read the ProPublica piece or listen to the show. Segarra secretly recorded a number of conversations with her superiors, which add weight to her allegations. At its simplest, the dispute was over whether Goldman had a true conflict of interest policy, and it occurred within the context of a proposed deal that Goldman had put together with the Spanish bank Banco Santander.

The deal was less significant than the clash between Segarra and her superiors because it went directly to a cultural issue that current New York Fed President William Dudley had been warned about in 2009. After the financial crisis, Dudley commissioned Columbia University finance professor David Beim to do a thorough investigation of the New York Fed – and determine why it had been caught flatfooted by the financial vulnerability of several large banks during the crisis. Dudley wanted to know how the New York Fed could do better, and one of Beim’s conclusions was that the bank was ruled by “groupthink” and a preference for consensus that blunted the edge of its supervisory actions with banks under its authority.  One anonymous New York Fed employee interviewed for the story used the term “regulatory capture” to describe an environment in which, in effect, the guards had become too accommodating of the inmates. In his report, Beim said the bank needed to hire examiners like Segarra who would challenge this rule-by-consensus mentality that dominated the bank’s culture. When Segarra was fired, it seemed to indicate just how strong that culture was.

It will be interesting to see how much impact this story has on the New York Fed, and on bank supervision in general.  Massachusetts Sen. Elizabeth Warren and Ohio Sen. Sherrod Brown – both ardent and outspoken opponents of big banks, and both members of the Senate Banking Committee – have seized on the story as evidence that regulators aren’t being tough enough on big banks.

“Congress must hold oversight hearings on the disturbing issues raised by [the Segarra] whistleblower report when it returns in November, because it’s our job to make sure our financial regulators are doing their jobs,” Warren said in a statement. “When regulators care more about protecting big banks from accountability then they do about protecting the American people from risky and illegal behavior on Wall Street, it threatens our whole economy. We learned this the hard way in 2008.”

Let me interject something important here: No one at the New York Fed – including, apparently, Segarra – accused Goldman of doing anything illegal. The proposed deal with Banco Santander called for Goldman to hold an unspecified number of shares in a Brazilian subsidiary for a few years and then return them. In early 2012, the European Banking Authority was requiring that banks increase their capital ratios, and taking assets off of Santander’s balance sheet would accomplish that even if no new capital was raised. In return for this service Goldman would receive a $40 million fee. In the ProPublica story, Segarra’s boss is said to have conceded that the deal was “perfectly legal” even if he disliked the fact that it made Santander appear healthier than it actually was. The issue between Segarra and her superiors was whether Goldman’s conflict of interest policy was robust enough.

I don’t think that anyone could argue that bank regulation hasn’t been dramatically strengthened since the crisis. The Dodd-Frank Act has imposed significant restrictions on the industry, and the Basel III rules require banks to carry more capital – particularly very large institutions, which must have even higher capital ratios than smaller ones.  But laws are only one aspect of regulation; the second aspect is supervision – the constant, sometimes daily interplay between examiners and the banks they oversee. If there was one thing about the ProPublica story that troubled me from a journalistic perspective, it was the inference that Segarra’s experience was representative of everything that happens inside the New York Fed. Perhaps it is, but there’s no way of knowing that for sure. We are left with that impression, but is that really the case?

I know from experience that when it comes to journalists, the Fed has a reserve that can be perceived as arrogance. Sometimes it will consent to speak with you, but often it won’t. ProPublica has pulled back the curtain a little bit and given us a very unfaltering look inside the New York Fed. While this would be very uncharacteristic for an institution that prefers to keep its curtains drawn, it’s going up to be up to the bank itself to show the public – and Congress — that the men behind the curtain aren’t just a bunch of phony wizards. If the Fed doesn’t embrace a greater level of transparency, Elizabeth Warren would be pleased to impose it.