Carmen Segarra shows ASIC a way out of the shambles

We all hoped that regulators would learn something from the catastrophic mistakes that produced the Global Financial Crisis.

The September 26^th episode of This American Life, covering the case of New York Federal Reserve employee Carmen Segarra, shows that regulators fully understood the changes they needed to make. It also reveals how they have been utterly incapable of making them.

There is no better window into why ASIC is a pushover for the big banks, which is why the lack of local coverage of the story is mystifying.

There are many problems with our financial regulators, but the biggest is how they come to identify with the interests of those they're regulating, a process aided by the revolving door marked 'higher paying job' that sits uncomfortably between them.

Carmen Segarra, a whip smart, uncompromising investigator with 13 years experience in bank compliance, first got a job with the New York Fed in 2011. Charged with overseeing Wall Street 'too-big-to-fail-bank' Goldman Sachs, she was sacked within seven months.

Why? Well, her employer claims it was because she was a difficult, abrasive character. The truth was that she did her job too well, and that was an irritation to her superiors, who preferred to make life easy for Goldmans.

Perhaps anticipating the chain of events, Segarra made 46 hours of secret recordings that show, from the inside, how the banking regulator rolls over, plays dead and sacks employees that take their job seriously.

The weird thing is that Segarra is exactly the kind of employee regulators know they need.

Not a year after the 2008 crisis the then head of the New York Fed recruited Columbia finance professor David Beim to investigate how his institution had so miserably failed.

Beim didn't mince words. As Pro Publica notes, his '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.'

A footnote from an anonymous New York Fed employee captured the zeitgeist: 'Within three weeks on the job, I saw the capture set in'.

The solution, according to Beim, was to 'hire expert examiners who were unafraid to speak up and then encourage them to do so.'

Carmen Segarra fitted that brief like a glove. Yet the culture that Beim criticised demoralised her, chewed her up and finally, spat her out. For all the gory details, read the Pro Publica story.

The parallels with our own regulators are striking. Having uncovered industrial-scale wrongdoing at Commonwealth Bank's financial planning operations, ASIC disclosed that 26 planners it deemed 'critical' still worked at the bank eight years after uncovering misdeeds including fraud.

When whistleblower Jeff Morris handed them the case on the plate, they sat on their hands for a further 18 months. Even a former ASIC lawyer says the agency favours big business.

Despite all the hand sitting and clear evidence of regulatory failure, ASIC head Greg Medcraft demonstrated the defensive mindset, claiming that 'recent media reports have tried to cast doubt on ASIC's good work and smear our staff and culture'.

More recent Fairfax revelations about a Penske file – a cheat sheet for Macquarie Group financial planners to help them retain their - cough, splutter - professional accreditation – led ASIC to neither confirm or deny it had a copy.

How's that for unnecessary secrecy? ASIC denied accusations from Fairfax that it had lost what it refuses to acknowledge it had. It's a barmy old world, folks.

How someone like Medcraft, with a bedrock belief in self-regulation, gets a job with the corporate regulator in the first place is a mystery. Why have a regulator that doesn't believe in regulation if not to wave through whatever the market decides?

His publicly expressed intention to return to the industry from which he came is an even bigger issue. It takes a special kind of character to get tough with their possible future employer and Medcraft shows little sign of such fight and obstinacy.

Nevertheless, he has a chance to undertake lasting, beneficial reform despite his future career aspirations.

During the recent Senate hearing into ASIC, Senator Williams said, 'I'm sick of hearing about people getting their nest eggs robbed. I expect the industry to be cleaned up and I want a regulator that is feared, not a wimpy group of bureaucrats.'

Medcraft's could make a start by picking up the phone to Carmen Segarra and see if she fancies a move down under.