Report: GAO to probe 'regulatory capture' of Wall Street watchdogs

A government watchdog is reportedly preparing to examine whether the Federal Reserve is too lax in its oversight of banks.

Reuters reported Friday that the Government Accountability Office (GAO) is embarking on its first-ever probe on “regulatory capture,” following a request from two House Democrats.


Rep. Maxine Waters (Calif.), the top-ranking Democrat on the House Financial Services Committee; and Rep. Al GreenAlexander (Al) N. GreenDemocrats highlight lack of diversity at major banks in new report House passes supplemental disaster relief for Puerto Rico Clinton advises checking your voter registration during Trump's State of the Union MORE (Texas), the top Democrat on that panel’s oversight subcommittee, asked for the review.

The letter was sent in October, but the GAO told the news service it was planning for the external review.

Questions of “regulatory capture,” which is the concern that regulators become too close to the entities they monitor and thus lose objectivity or strictness, have dogged regulators since the financial crisis.

The Fed in particular has faced pointed charges from congressional Democrats, especially after a former regulator at the Federal Reserve Bank of New York charged with monitoring Goldman Sachs claims she was fired from the regulator for refusing to soften her approach.

The former Fed employee, Carmen Segarra, eventually sued the New York Fed for her termination but lost her court case. But Democrats seized on her complaints as evidence that regulators are too soft when it comes to policing financial institutions.

Coupled with lingering gripes from congressional Republicans about the Fed’s policies and overall operations, and it places the central bank in a politically precarious spot as it also tries to navigate a potential series of interest rate hikes in the coming months.

But Republicans have a different outlook on how to tackle the matter, drawing distance from the Democrat-requested probe.

“The most effective way to fight regulatory capture is to pass simpler laws. That way the biggest firms and their captive bureaucrats can’t rig the system,” a House GOP staffer said.

A GAO official told Reuters the review would cover all financial regulators including the Fed. The central bank plans to cooperate with the probe.