Transcript: Sen. Warren's Full NPR Interview On Financial Regulation Elizabeth Warren tells Morning Edition that audio tapes made by an investigator working for the New York Fed re-enforce the perception of a disturbingly cozy relationship between regulators and banks.
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Transcript: Sen. Warren's Full NPR Interview On Financial Regulation

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Transcript: Sen. Warren's Full NPR Interview On Financial Regulation

Transcript: Sen. Warren's Full NPR Interview On Financial Regulation

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STEVE INSKEEP, HOST:

We have a follow-up this morning on a story from inside the Federal Reserve Bank of New York.

AUDIE CORNISH, HOST:

Secret recordings by a former employee showed how the Fed oversaw Goldman Sachs. We heard some of those tapes on MORNING EDITION Friday.

INSKEEP: In the tapes, bank examiners consider what to do about a major Goldman transaction.

(SOUNDBITE OF ARCHIVED RECORDING)

UNIDENTIFIED MAN #1: We're looking at a transaction that's legal, but shady.

INSKEEP: Legal, but shady, the examiner says. In the end, examiners seem to do very little about it.

CORNISH: Former examiner Carmen Segarra made the recordings. ProPublica reported their existence along with the public radio program This American Life. And now numerous lawmakers, largely Democrats, are calling for hearings.

INSKEEP: One of them is Senator Elizabeth Warren of Massachusetts who once oversaw the Federal Bank bailout and has now made bank regulation a signature issue.

SENATOR ELIZABETH WARREN: Ultimately this report tells us exactly what we already know; that the relationship between regulators and the financial institutions they oversee is too cozy to provide the kind of tough oversight that's really needed.

INSKEEP: How is it too cozy? Because of course we hear the regulators on these tapes saying there's a reason that we're trying to have good relationships with banks like Goldman Sachs. We want to know what's going on. We want to get information.

WARREN: Oh, golly. So, look, for me, there were two things that jumped out. The first was just a basic lack of truthful reporting. Supervisors are actually telling examiners not to report accurately the damning things they'd heard from bank executives during meetings. I mean, wow. If there's not even an accurate record of what's going on, then the regulators can't hope to do their jobs. And the second thing, look at how the Fed emphasized talk instead of action. You know, the regulators seem to think that it was a victory just to raise an issue. And that's the kind of approach that allowed banks to take on massive risks before the financial crisis. Does anyone believe that Goldman Sachs is going to give up a deal that would yield millions of dollars because someone fussed at them behind closed doors?

INSKEEP: The regulators describe this particular deal that was reported on in great detail on the tapes as a transaction that was legal, but shady. It did seem to be within the rules. Does that suggest a problem with regulators or the rules?

WARREN: For me, it starts as a problem with the regulators. And let me describe it this way - the cultural problem isn't just some secondary concern; it's the whole ball game. We can keep making the rules tougher and tougher, but it won't make an ounce of difference if the regulators won't enforce the rules that are there. If the regulators back down or back off whenever the banks tell them to, then it's the banks and not the regulators who are running the show.

INSKEEP: Now you mentioned a cultural problem, Senator Warren. Of course way back in 2009, there was a report commissioned by the Fed that identified this cultural problem, a reluctance to speak up and a suggestion of a too-close relationship with the banks. But what can you really do about that given that you need to have regulators who perhaps have experience in the financial industry and are going to get to know the financial industry and the people in it really well?

WARREN: Well, you know, the first thing we can do is expose it. I mean, that's where this really starts. That's the first step. And that's why it is I want to see oversight hearings; I want to get a complete picture of what's happened here. But we need to move on this and move quickly because the big banks are just getting bigger, and they're taking on new kinds of risks. We need to have regulators who understand that they work for the American people, not for the big banks.

INSKEEP: I should mention that these allegations have been around for a while. Carmen Segarra's story has been known for a while; what is new here is the tapes. Was there something just from listening to the tapes that you learned that you did not know before?

WARREN: You know, there is something about listening to those tapes. There's no more he-said, she-said, one person describes it this way and another says no. It's that you really do for a moment get to be the fly on the wall that watches all of it. And there it is to be exposed to everyone, the cozy relationship, the fact that the Fed is more concerned about its relationship with a too-big-to-fail bank than it is with protecting the American public.

INSKEEP: I suppose if a Goldman official were sitting here, they might point out Goldman was complying with the law, at least according to some of the regulators. And the problem was whether they were doing something that was around the edges of the law, so to speak.

WARREN: Well, yeah, but this is partly the role of the regulator. A regulator doesn't say to a big financial institution, hey, step right up here, get your toes on the line. And so long as you can make a legal argument that you have not crossed the line then, hey, we're all cool here. That's not the way regulation of large financial institutions is supposed to work. They're supposed to be using judgment. The point of these tapes is that the regulators are backing off long before anyone's in court making a legal argument about whether or not they came right up to the line or they crossed it.

INSKEEP: Do you think that regulators in a situation like that could say, listen, this may be legal, but I don't like it, don't do it?

WARREN: You know, I think what regulators can do is they can remind these large financial institutions that there's a lot of room in there for the large financial institutions to get themselves into trouble and to get the entire economy into trouble. I mean, look, that's what happened in 2008. The regulators had the tools to say to the big financial institutions, hey, guys, you've got to back off. You're putting the whole system at risk when you do this, and yet the regulators didn't do that. They were willful and kind of cozy relationship as the big financial institutions continued to run their operations, taking on more risk, doing what they want to do and brushing their regulators aside.

INSKEEP: Senator Warren, this is something that you're clearly passionate about, but it's a complicated issue - bank regulation. What would have to happen for it to be a major campaign issue this fall or in 2016?

WARREN: I think it already is a campaign issue. The way I see it is for everybody who's running right now in 2014, there's a fundamental question of, whose side do you stand on? You know, the game out there is rigged, and people across this country really get it. And Goldman Sachs' tapes just show it one more time. Little banks have to follow the rules, regular families have to follow the rules, but big financial institutions, somehow they can manage just to push their regulators aside and go forward. There's a fundamental question about who this country works for. It can't just work for those who already have lots of money and lots of power. We've got to have a country that works for everybody else.

INSKEEP: Senator Elizabeth Warren of Massachusetts, thanks very much.

WARREN: Thank you.

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