Weekend Update October 10

ABSTRACT: After precious metals tracked with stocks into red territory last week, the metals reversed direction on persistent fears that Europe and Russia will drag down the global economy. The stock markets recovered much of their losses from early in the week following the release of September’s FOMC meeting minutes; the minutes and statements by the Fed essentially reaffirmed the central bank’s inclination toward accommodative monetary policy for at least the next several months.
GOVERNMENT & POLICY Goldman Sachs, NY Fed Draw Regulatory Scrutiny
It seems there is never a dull moment when it comes to the Federal Reserve these days. With the release of the Federal Reserve Open Market Committee (FOMC) minutes from the group’s September meeting, the news of an unchanged outlook from the Fed was expected to carry the day. Indeed, investors responded with fervent optimism on Wednesday when it became clear the Fed intends to continue delaying normalizing monetary policy until more lag has been removed from the economy. This was after President Obama met with a group of financial regulators, including Fed Chair Janet Yellen, on Monday.
Yet, the FOMC’s signals that it will ‘stay the course’ held the attention of the markets only briefly, while the more scintillating story revolved around the emerging relationship between Goldman Sachs and the New York Fed. A whistle-blower from the bank accused the NY Fed of being ‘soft’ on Goldman Sachs, overlooking its less savory activities and even deferring to Goldman on certain regulatory issues. The informant, Ms. Carmen Segarra, complained about the apparent favoritism to her employer and was summarily fired. She did, however, make secret recordings that reveal the bank ignored red flags of Goldman’s questionable practices, deeming them ‘legal, but shady.’ The Securities and Exchange Commission (SEC) has raised concerns that Goldman Sachs exploits conflicts of interest, alleging that Goldman has dubiously sold financial products to their customers while simultaneously placing speculative bets against the performance of those products.
This developing story again raises the issue of the Fed being overly sympathetic to the financial institutions it is tasked with overseeing. Massachusetts Senator Elizabeth Warren has called for a Senate Banking Committee hearing on the topic, pointing out that the Fed ‘can identify problems, but can’t bring itself to make the banks fix those problems.’ The New York Fed, always the most powerful branch of the Federal Reserve System, has a long history of close dealings with Wall Street. Consider for a moment that the NY Fed President, William Dudley, served as chief economist for Goldman Sachs from 1986 to 2007. Although this inextricable connectedness is the nature of the financial industry, it should never rise to the level of outright cronyism. As the scandal continues to unfold, we wait to see how much teeth a response from the regulatory community will have.

This post was published at Deviant Investor on October 12, 2014.