The Bank-Friendly Eighth Governor of the Fed
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The debate over whether Janet Yellen or Lawrence H. Summers will be the next Federal Reserve chairman — or some dark horse, Timothy F. Geithner perhaps? — is doubtlessly important.
But few outside the arcane world of banking rules understand that on matters of financial regulation and reform, the Federal Reserve staff is just as powerful, maybe even more.
Federal Reserve chairman and governors come — and then go back to their gilded Wall Street corners or quiet academic redoubts. Regulatory staffs form the permanent government of Washington.
So now we turn to the man they call the “eighth governor,” the general counsel of the Federal Reserve, Scott G. Alvarez.
The Office of the Comptroller of the Currency had Julie Williams, who could be counted on by the banks as a bulwark against periodic regulatory squalls. She has since decamped, joining the banking consulting firm Promontory Financial Group last year.
Mr. Alvarez joined the Fed in 1981 and has been the general counsel since 2004. A top regulator who regularly deals with the Fed told me: “He’s a major player in everything. You can’t overstate his role. Everything has go to him for approval and to be passed on.”
And he certainly has defenders. Mr. Alvarez is “decent, honorable and dedicated,” said Jerome H. Powell, a Fed governor. “Without question, he is a very careful attorney. He has no ideological agenda. His agenda is advancing the public good and advancing the Board’s views.”
In a statement, Ben S. Bernanke, the chairman of the Federal Reserve, said: “During his more than 30 years of public service, Scott Alvarez has skillfully and knowledgeably represented the views of the Federal Reserve Board — before the courts, in interagency discussions, and before the Congress — in exemplary fashion.”
Mr. Alvarez rarely if ever gives interviews — through the Fed, he declined to speak to me for this column — and the central bank’s famous secrecy veils many of his actions and opinions. So there’s a lot about Mr. Alvarez that we don’t know. Even those who negotiate directly with him can’t know for sure if he is expressing his views or those of the board.
To his critics, he has become the personification of the Fed’s intransigence, the power behind the throne. He is, they argue, a smart, genteel and assiduous protector of its power and prerogatives.
“General counsels in regulatory agencies tend to grow more conservative — not politically but temperamentally. They become more resistant as matter of instinct to change, and that makes it more difficult to implement new regulation,” said Robert C. Hockett, a Cornell law professor and a regular consultant to the New York Fed.
The general counsel often controls what is presented to the board, narrowing the range of possibilities. I’ve been talking to fellow regulators, Congressional and executive branch staff members, academics, Washington lobbyists and banking reformers. Mr. Alvarez has managed to convince most of them of his innate bank friendliness.
The problem is that the Fed often confuses protecting its power with protecting the banks. Take disclosure. In fighting against having to divulge more about its extraordinary lending during the crisis, the central bank wrapped its arguments in legal justifications, which Mr. Alvarez oversees. They just happened to be arguments that would also prevent the release of information the banks didn’t want revealed.
In the recent debate about how much capital the leviathan banks should carry, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, which has become a more skeptical regulator under Thomas J. Curry, pushed for greater levels of protection. The Fed resisted. The O.C.C. and the F.D.I.C. wanted 6 percent at the level of bank holding companies. The Fed ultimately didn’t, and the three agencies compromised at 5 percent.
Was this Mr. Alvarez’s position? It’s hard to say. But the board of governors is filled with capital hawks, including Daniel K. Tarullo, the powerful governor responsible for regulatory matters. Yet when it came down to it, the Fed didn’t hold out for a higher number, which would have made the banking system safer with little downside.
Mr. Alvarez typically keeps his views out of the public eye, but seems to be willing to express them privately. During a nonpublic briefing to Congressional staff members on May 18, 2012, about the JPMorgan Chase trading loss, known as the London Whale incident, Mr. Alvarez made a series of comments that alarmed some staff members, according to one who attended. He came off to this person as cavalier about the Fed’s responsibilities and the loss itself. He emphasized that the Fed did not review individual trades but instead oversaw banks’ risk management, policies and procedures.
Of course, that is true. But the Fed, and all the other regulators (as well as JPMorgan’s management), had missed the buildup of dangerous positions at the giant bank, only to find out about it when the media broke the story. To my source, Mr. Alvarez didn’t seem too interested in thinking about the larger implications of the loss.
Such aloofness would be particularly disturbing in light of what others who were more concerned about the losses eventually found. The Senate Permanent Subcommittee on Investigations uncovered a number of troubling aspects of the trading fiasco, including that traders had manipulated the accounting to game their capital standards.
Perhaps more alarming, Mr. Alvarez opined at the meeting about the origins of the financial crisis, attributing the cause to “regular mortgage lending,” according to the attendee.
This just happens to be what the banks contend, too, minimizing the spectacular failures of their own risk management, their accumulation of disastrous positions in mortgage securities, their inability to understand their own books and how entwined they were with their counterparties. In fact, “regular” government-backed mortgage lending was at most a minor contributing factor.
In response, the Fed points out that in an interview with the Financial Crisis Inquiry Commission, Mr. Alvarez replied to a similar question with a more wide-ranging answer that got to some of these issues.
When Scott Brown, the former Massachusetts senator, was in the re-election fight that he would eventually lose to Elizabeth Warren, the stalwart banking reform advocate, one of his staff members appealed to Mr. Alvarez for some help on the Volcker Rule. The regulation, which prevents banks from speculating for their own profits with money that is effectively backed by taxpayers, is deeply unpopular with the banks.
Mr. Alvarez seemed to share their skepticism, according to an account in The New York Times, saying that the Volcker Rule raised complicated issues and encouraging Mr. Brown to go public with his concerns. An alternate interpretation is that he wasn’t seeking to stir up action against the rule, but merely stating that anyone has the right to file a public comment.
That’s possible. But when the Volcker Rule was being written, Mr. Alvarez and the Fed pushed to open exemptions in the rule that would soften its impact, according to people involved in drafting the rule.
Recently, the Fed has produced legal analyses, over which Mr. Alvarez has final approval, regarding aspects of Dodd-Frank that would call for regulatory fixes. Two of these involve capital regulations at insurance companies and derivatives reform. The Fed’s interpretations could mean that Congress will have to make some legislative fixes. That could open the door for Dodd-Frank critics, who want to gut the reforms with new legislation. Reopening Dodd-Frank now is a recipe for rolling it back.
The revolving door is often cited as a major problem in Washington, and it is. But it’s not the only one. Holdouts from the deregulatory era still carry weight in the capital.
About The Trade
Recent Stories by Jesse Eisinger
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