Six years after the financial crisis, fall 2014 was a low point for Wall Street’s influence in the federal agencies tasked with overseeing it.
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.
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