A new lawsuit against the Federal Reserve of New York accentuates the difficult current climate for Wall Street giants and regulators alike. The lawsuit for improper termination was filed by former Fed bank examiner Carmen Segarra. In the suit, Segarra claims she was fired from her senior position for refusing to change her critical findings in regards to Goldman Sachs Group (GS).
Segarra elaborates that through seven months of auditing Goldman Sachs, she indisputably determined that the bank was not meeting regulatory restrictions against financial conflicts of interests. Her presentation of findings was the first step in a regulatory downgrade that could have led to more serious actions. Though it's not publicly clear if that downgrade took place, Segarra claims that New York Fed officers Michael Silva and Michael Koh acted improperly to hinder any regulatory actions. Along with Segarra's former boss Johnathon Kim, both Silva and Koh are named defendants in Segarra's unfolding suit. Seeking redress, Segarra claims she was fired primarily to protect the Goldman's reputation, although her investigations of Solyndra and Capmark factored in as well.
Representatives from the New York Fed denied all allegations and the fate of Segarra's course are uncertain. However the lawsuit plays out, it comes at a time when Federal Reserve and government regulators are under increasing fire for aiding and abetting Wall Street excess. Though Wall Street firms like J.P Morgan & Chase (JPM) have recently fielded major fines, some critics argue this is too little, too late after years of poor oversight and growing moral hazard.
It is fascinating to ponder what star investor Warren Buffett (BRK.A, BRK.B) thinks about the latest controversy featuring Goldman Sachs. Buffett famously came to Goldman's aid in 2008, using his massive investment to help show that the ailing company could survive its serious calamities. Today, Buffett is still a major stockholder with deep interest in the firm. Known as "the Wise Man of Omaha" for his consistent successes, Buffett may well be wondering if his efforts for Goldman Sachs helped perpetuate a broken system.
As Wall Street lawsuits and controversies pile up, it is clear that the financial sector contains many who lack caution or accountability. Whether one thinks these players are outliers or institutionally entrenched largely depends on one's general attitude towards modern Wall Street.
So far, the investing public has shown remarkable latitude towards troubled Wall Street stalwarts. For example, J.P Morgan faced one crisis after another over last summer and early fall. Despite these issues, the firm's stock price remains positive for the year. Since Goldman Sachs has a troubled history of instability, this company is far more vulnerable to negative publicity and falling stock prices. In the coming weeks and months, the company may once again experience hard times and uncertainties. Whatever Goldman's ultimate fate, it is doubtful that Wall Street executives and their regulators will learn to change their bad habits without steady external pressure. If whistleblowers like Carmen Segarra cast light on Wall Street's institutional instability, they are doing a difficult but critical service for the financial industry and the investing public.
Given the run up in the stock price of Goldman Sachs over the past year, it may be an appropriate time to take some profits. The market is also up substantially and the dark climate in Washington could lead to a correction in the large financial stocks and the market in general over the next several months.
Additional disclosure: This article is neither a recommendation to buy or sell shares, and investors should always do their own research.