Trump, GOP want regulators out of boardrooms

Then, the Federal Reserve was forced by Congress to scramble to prove that it wasn’t too closely entwined with big banks and to demonstrate that the revolving door between its offices and bank trading desks had been shut.

Almost three years later, the opposite is true. Republicans are pushing to get regulators out of boardrooms in addition to their broader agenda of lessening the burden of financial regulatory laws and administration.

In September 2014, a former Federal Reserve Bank of New York examiner embedded in Goldman Sachs, Carmen Segarra, had released tapes of her clashing with her supervisor over whether to sign off on one of Goldman Sachs’ deals. Having been fired by the New York Fed, Segarra presented herself as a whistleblower, claiming that regulators are too deferential to and cozy with the bankers they are supposed to oversee.

That was the last thing that liberals such as Sens. Elizabeth Warren and Sherrod Brown wanted to hear. The head of the New York Fed, himself a Goldman Sachs alumnus, was hauled before the Senate in Washington and grilled on a Friday in November.

Amid the controversy, the entire Fed announced a review of its supervision of megabanks to ensure that it was being tough enough.

In October, Fed governor Daniel Tarullo, the point man at the central bank who would be responsible for the implementation of many of the post-crisis banking reforms, issued a warning to banks. At an event in New York City, he told bankers that if they didn’t control the behavior of their employees, they would face punishment from regulators.

Compliance wasn’t enough, he said. Instead, “what we want to see is good compliance.”

Regulators, Tarullo explained, can tell when bankers are simply going through the motions, such as in the annual “stress tests” conducted by the Fed to see whether banks could survive a hypothetical crisis. Bankers trying to simply check the boxes so they could move on would be subjected to greater scrutiny by government regulators, he said.

In other words, the pressure was on regulators to look over bankers’ shoulders.

Today, the winds are blowing the opposite direction.

Republicans in Congress and the Trump administration are looking to replace the 2010 Dodd-Frank financial reform law signed by former President Barack Obama and roll back many of the rules that it imposed on banks, hedge funds, and other financial firms.

But the push to rein in regulators is about more than a specific rule or law. The effort also includes changing the relationship between banks and government regulators, giving less discretion to government representatives and more latitude to bankers.

It is the opposite approach of the one taken by Warren and Sen. Bernie Sanders, who have argued that the financial industry has too much freedom and too much clout in Washington.

The problem, according to critics, is that regulators — especially ones physically located within banks — have expanded power under the post-crisis laws to intervene in bank business, to weigh in on board decisions, and to shape strategies. The concern is that they can do so outside of the federal rulemaking process, in closed-door, confidential settings at which the banks aren’t able to publicly stand up for themselves.

The Fed’s mandate to ensure the safety of banks “justifies all sorts of secret, behind the scenes arm-twisting,” said Paul Atkins, head of the financial consulting firm Patomak Global Partners and former transition adviser to Trump. The regulators’ involvement “provides challenges for people trying to operate,” he said.

The Trump administration announced its intentions to revamp the relationship between regulators and bankers in the financial regulatory report the Treasury Department published in June. Alongside a long list of regulations that the Treasury called for scaling back or eliminating, the report knocked the annual stress tests and living wills required by regulators for lacking transparency. Furthermore, the report called for a “significant shift” away from the government’s current level of interactions with bank directors, citing feedback from bank boards complaining about regulators second-guessing boards on issues such as the risks a bank is taking in its credit card line of business or the amount of subprime loans it is issuing.

Republican concerns about regulators in boardrooms rose to the surface in Fed Chairwoman Janet Yellen’s latest trip to the Capitol. Then, several lawmakers suggested that they wanted to see a retrenchment.

“From the feedback that we get, the involvement that the Fed has in our corporate boardrooms has far surpassed, I think, the vision that any of us had in this room, and it concerns us,” said Rep. Sean Duffy of Wisconsin, a member of the House Financial Services Committee.

Rep. Bill Huizenga of Michigan, chairman of the financial markets subcommittee, reached into the past to cite a 2014 speech by Tarullo in which the Fed governor proposed adding regulatory goals to the list of bank directors’ responsibilities.

A spokesman for Huizenga said that he “believes the Fed is trying to go outside both their expertise and their authority,” and that he will “continue to highlight the intrusive nature of the Fed’s heightened prudential supervision of [big financial firms], and the potential abuse of their supervisory authority to influence ‘business’ decisions of their regulated entities.”

The area of Fed supervision is an example of how government oversight of the financial system can change even if Congress doesn’t change any laws.

The first step to overhauling the way supervisors interact with boards is to have members of Congress push for changes. Lawmakers such as Huizenga and Duffy are doing just that.

The second step is to replace the regulators with people more likely to take a hands-off approach. Trump is on his way to doing that. To replace Tarullo as the lead regulatory expert at the Fed, he has nominated former private equity financier and Bush Treasury official Randal Quarles to be vice chairman for supervision. Quarles is expected to pursue a more business-friendly approach to the job than Tarullo, who was never officially named vice chairman but served as point man for regulatory issues.

The last step would be legislation to limit the opportunities for regulators to get involved in bank business. “There’s all kinds of conflicts in Dodd-Frank between the way a board would govern a bank and what officials want them to do,” said Paul Kupiec, a scholar at the American Enterprise Institute who one Republican cited to Yellen to make the case that the Fed is effectively running big banks.

Today, the top of the list would be the stress tests, the annual exercises in which regulators simulate a recession and see how banks would hold up. Because the regulators can design the financial crisis scenarios and terms of passing grades each year, banks see the tests as a way to impose new standards without going through the normal administrative process that gives them a chance to shape them. Second would be the living wills that banks are required to write spelling out plans for going bankrupt safely in case of a failure, in which regulators can set certain requirements.

This article has been updated to clarify Paul Atkins’ identification.