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.
