If you want an example of why distrust of American institutions is at epidemic proportions, listen to the investigative report of the New York Federal Reserve based on secret tapes made by one of its Senior Bank Examiners, Carmen Segarra. Segarra, a lawyer with impeccable credentials, was hired by the Federal Reserve after the financial crisis, as part of an effort to bring in new personnel who were more willing to stand up to the banks they were charged with regulating.Tough and idealistic, Segarra was stationed with a Federal Reserve team of bank supervisors inside Goldman Sachs. At Goldman, she witnessed such collusion and fecklessness on the part of her Federal Reserve colleagues that she began taping her conversations and meetings. The result is an inside look at the way America’s top financial regulators refuse to do their jobs. Oh, and of course Segarra lost her job for courageously speaking up and insisting that the Federal Reserve use its powers to regulate the banks.Segarra’s story is told jointly in an hour-long radio show by Ira Glass on This American Life and in an investigative article by ProPublica’s Jake Bernstein. Bernstein begins his story with a report of a once secret report by Columbia University Professor David Beim. Beim was hired by the Federal Reserve to study why the Fed had failed adequately to regulate banks in the lead-up to the 2008 financial crisis. Here is Bernstein’s account:
In the end, [Beim’s] 27-page report laid bare a culture ruled by groupthink, where managers used consensus decision-making and layers of vetting to water down findings. Examiners feared to speak up lest they make a mistake or contradict higher-ups. Excessive secrecy stymied action and empowered gatekeepers, who used their authority to protect the banks they supervised.“Our review of lessons learned from the crisis reveals a culture that is too risk-averse to respond quickly and flexibly to new challenges,” the report stated. “A number of people believe that supervisors paid excessive deference to banks, and as a result they were less aggressive in finding issues or in following up on them in a forceful way.”One New York Fed employee, a supervisor, described his experience in terms of “regulatory capture,” the phrase commonly used to describe a situation where banks co-opt regulators. Beim included the remark in a footnote. “Within three weeks on the job, I saw the capture set in,” the manager stated.Confronted with the quotation, senior officers at the Fed asked the professor to remove it from the report, according to Beim. “They didn’t give an argument,” Beim said in an interview. “They were embarrassed.” He refused to change it.
Beim’s report concluded with recommendations, and chief among them was that the Fed hire new, highly qualified, and more independent bank examiners. Segarra was hired as part of that program.Immediately, Segarra clashed with the longtime Federal Reserve employees. She wrote reports that clearly stated problematic and sometimes illegal activity and refused to change her reports when asked by her supervisors. She was shocked at the submissiveness her colleagues showed to the Goldman bankers, and she let her opinions be heard. Then, amidst an investigation into Goldman’s lack of a conflict of interest policy, she was called into a meeting with her boss, Jonathan Kim. Here is how Bernstein tells the story:
In a tense, 40-minute meeting recorded the week before she was fired, Segarra’s boss repeatedly tries to persuade her to change her conclusion that Goldman was missing a policy to handle conflicts of interest. Segarra offered to review her evidence with higher-ups and told her boss she would accept being overruled once her findings were submitted. It wasn’t enough.“Why do you have to say there’s no policy?” her boss said near the end of the grueling session.“Professionally,” Segarra responded, “I cannot agree.”
Over and over, Segarra tells of situations in which the Fed had the authority to act to rein Goldman in and refused to do so. Its inaction was not a result of the complexity of financial rules. Nor did Goldman bankers simply outwit their regulators, as is sometimes assumed. Instead, the Fed simply refused to use the powers accorded to it. She was told by her superior that she was too “conclusory.” Her boss, Jonathan Kim, says on tape: “You use the word ‘definitely’ a lot, too. If you use that, then you want to have a consensus view of definitely, not only your own.” What is more, he said that she was too “transactional” and had to be more “relational.” Here is one part of the transcript from the This American Life program in which Bernstein speaks with David Beim, the Columbia Professor who studied the Fed, and Segarra:
David Beim: So I could just read the fear of speaking up list of quotations. And it goes like this: “Don’t want to be too far outside from where management is thinking. The organization does not encourage thinking outside the box. After you get shot down a couple of times, you tend not to go there anymore. Until I know what my boss thinks, I don’t want to tell you.”Jake Bernstein: According to Beim’s report, this culture of fear paralyzed the Fed in the years leading up to the financial crisis and prevented it from taking action. It’s not that the Fed regulators didn’t notice the problems accumulating in the financial system that eventually brought it down.David Beim: They were aware of those problems coming. There were lengthy presentations on subjects like that within the organization. It’s just that none of those meetings ever ended with anyone saying, “and therefore let’s take the following steps right now.”Carmen Segarra: I mean they’re meetings without a clear agenda, they’re meetings without clear objectives.Jake Bernstein: Carmen was used to the private sector, where she says meetings ended with specific action items. People knew what they were supposed to do.Carmen Segarra: None of that happens at the Fed. It’s like the information is discussed, and then it just ends up in like a vacuum floating on air, not acted upon. And the mere act of having this meeting, for them, is almost like akin to having done something about it.
Carmen Segarra’s Goldman tapes recall the chapters on Jeff Connaughton in George Packer’s National Book Award-winning The Unwinding: An Inner History of the New America. Connaughton begins as an idealist, committed to the political career and policy prescriptions of his hero, the young Senator Joseph Biden. By the turn of the 20th century, Connaughton was a major lobbyist at Quinn Gillespie & Associates. Packer writes that Connaughton insists that lobbyists “weren’t crooks like Jack Abramoff.” According to Packer, Connaughton “got a little defensive when people talked about lobbying as if it were something dirty. Hell, almost all of Washington was suckling at the corporate tit (he had seen that at Covington & Burling), most of them doing the exact same thing as the few thousand registered lobbyists who got slammed for everyone’s sins.”Packer tells of Connaughton’s original discovery, his “universal theory of money in American life since the 1980s:
When the benefits exploded on both Wall Street and Washington, when it became possible to make millions of dollars in corporate boody—I’m a living example of it, no one’s ever heard of me and I walked out of Washington with millions of dollars—when the cost of certain behaviors diminished, when norms began to erode and disappear that had held people back at least from being garish about the way they made money, the culture changed. It changed on Wall Street and it changed in Washington.
Packer’s The Unwinding is a searing and beautiful interweaving of stories about Americans in which the unwinding of the American character is painfully visible. The “unwinding” Packer refers to began sometime after the 1960s, and it invokes the collapse of the institutions and structures that for generations had defined and supported American life. As the “norms that made the old institutions useful began to unwind,” Packer writes, “and the leaders abandoned their posts, the Roosevelt Republic that had reigned for almost half a century came undone. The void was filled by the default force in American life, organized money.”What distinguishes Packer’s account of America’s unwinding is his focus not simply on the loss of norms and values, but also on institutions. Packer does not excuse Connaughton and his fellow lobbyists, and he certainly pulls no punches in his descriptions of Biden, but Packer does understand that the moral and individual failings are part and parcel of a general failure of institutions, of politics and business and government.The same focus on institutional failure is visible in the other stories Packer tells. In telling the story of Dean Price, a dreamer from North Carolina, Packer makes visible Price’s idealism, his belief in the American dream, his striving, and his desire to do right by his family and his country. What Price wants, above all, is to be independent, self-sufficient. And as Price comes up with multiple ideas to bring him financial independence, he also turned to the internet to find all sorts of theories to believe in, from peak oil to utter political cynicism. Born into a deeply conservative religious family, Dean shed his political conservatism but also his belief in politics:
Now he believed that the country’s problems had started with Republicans. He lost his reverence for Reagan, and he had never had any for Bush. But he wasn’t exactly a Democrat, either. He was working things out on his own, using the Internet, without a political party or trade association or labor union or newspaper, without any institution to guide and support him. None of them had and credibility. He hated the banks and corporations but he didn’t trust the government, which seemed to be in conspiracy with big business. If anything, his opinions were becoming more like those of the rural populists in the late nineteenth century. “Sometimes I think I was born a hundred years too late,” Dean said.
Packer locates another aspect of institutional failure in his chapters on Tammy Thomas, a single mother turned community activist from Youngstown, Ohio. Youngstown failed in the 1970s so fast because the city was a one-industry town without institutions. Once the mills left, there was no symphony, no baseball team, no institutions to hold the city together. In Packer’s telling, Tammy begins her journey convinced that Youngstown is suffering from a moral disease, the unmotivated laziness of its citizens.
She had always put the blame on individuals for failing to help themselves. “One of the things that would frustrate me is when you see a person who ain’t got nothing, ain’t trying to get nothing, and don’t want nothing. An unmotivated person who doesn’t want to get better.” There was a lot of that in Youngstown, but now she saw it as the problem of a community. Generational poverty, failed schools, the loss of jobs—“A lot of it is not that they don’t want. It is because the system is designed in some instances like it feeds on people a little bit and messes up people’s minds. People get caught in it and they don’t know how to stop it.” In her own life she had stopped it, but she had never thought about politics—the city, the state, the country.
In a column on the Packer’s book, David Brooks wrote, “The Unwinding offers vivid snapshots of people who have experienced a loss of faith. As a way of understanding contemporary America, these examples are tantalizing. But they are also frustrating. The book is supposed to have social, economic and political implications, but there is no actual sociology, economics or political analysis in it.” The frustration Brooks notes results from Packer’s reportorial style: his book is an account of stories of America today, and he makes little or no effort to theorize those stories. It is, in essence, a chronicle of modern America. If there is optimism in The Unwinding, it is the idea that we are just living through another “period of fractiousness,” suggesting a coming renaissance of an American idea. But what is that idea? Packer leaves us suspended in the halo surrounding the question: What institutions are left that can sustain the dream and the reality of an American idea?The question Packer raises is: Is the problem America faces one of individual virtue or institutional decay? Or both? Last week I wrote about Charles Murray’s book Coming Apart, a book that argues that the “American project” is being undermined by the loss of the moral and spiritual virtues, the founding virtues of industriousness, honesty, marriage, and religion that “made America America.” For Murray, we are witnessing the hollowing out of the soul of both the American elite and the American poor. The poor are suffering mightily and are being isolated as an underclass, but they are unwilling or unable, in Murray’s telling, to honestly and virtuously embrace the virtues that might save them. Meanwhile, the elite are successful, but they believe in nothing, reminiscent of the “Excellent Sheep” that Bill Deresiewicz describes in his book Excellent Sheep: The Miseducation of the American Elite.Packer shares with Murray a deep worry about the future of an America that in Murray’s words is “coming apart” and, in Packer’s, “unwinding.” But if Murray sees the cause and the response to be in a debate about individual commitment to founding virtues, Packer focuses the conversation on the resurrection of governmental, business, and academic institutions.The two conversations about virtues and institutions need to happen together, which is why Packer and Murray will be speaking together at the opening panel of the Hannah Arendt Center Conference, “The Unmaking of Americans: Are There Still American Values Worth Fighting For?” You can read more about the conference here. For now, you’d do well to listen to the Ira Glass show on Carmen Segarra; what really is rewarding on a sunny day in September is to read George Packer’s The Unwinding.