Tuesday, December 10, 2013

Delamaide: Lew used clout to push Volcker Rule

WASHINGTON — The approval Tuesday of the Volcker Rule barring banks from speculative trading for their own account tells us a lot about the future of financial regulation in this country.

Using a new bully pulpit created by the Dodd-Frank financial reform, Treasury Secretary Jack Lew was able to bring the five agencies responsible for regulating banks together on this contentious issue in the face of massive headwinds from financial lobbyists.

Treasury chiefs in the past, while they could exert influence behind the scenes, were not really able to crack the whip in this fashion to get results more quickly.

Only one of the regulators, the Office of the Comptroller of the Currency, is part of Treasury and must heed the behests of the secretary, while the other four — the Federal Deposit Insurance Corp., the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Federal Reserve — are independent agencies that don't necessarily have to pay attention to the political appointee heading Treasury.

But Dodd-Frank created a new super-regulator — the Financial Stability Oversight Council — which brings the heads of these agencies and other officials around a table under the chairmanship of that very appointee.

The main task of the new panel is to be on the alert for systemic threats to the nation's financial infrastructure and head off the kind of meltdown we experienced in 2008. For now, this also includes monitoring implementation of Dodd-Frank rules designed to fill gaps in regulation uncovered by the recent crisis.

The FSOC, in short, provides the secretary with a platform to, well, bully regulators into action. And in the case of the Volcker Rule, Lew did not hesitate to use it.

The day after he was sworn in to take Timothy Geithner's place at Treasury nine months ago, Lew surprised the regulators by summoning an FSOC working group to break through the turf battles and logjams that were besetting the Volcker Rule.

In July, L! ew increased the pressure with a public threat to look for alternatives if Dodd-Frank reforms, and especially the Volcker Rule, were not in place by the end of the year.

It made no sense to have five different versions of a Volcker Rule floating around so the objective from the outset was to hammer out a draft that all five regulators could sign on to. But this process inevitably became mired in competing claims as lobbyists worked to influence the weakest links in the chain.

Lew's tactic, according to a senior Treasury official who briefed reporters ahead of this week's unveiling of the finished rule, was to set the pace. It turns out, this official said, that people don't like coming to meetings with the Treasury secretary and confessing they've made no progress.

It appears that Lew's experience as a two-time director of the Office of Management and Budget, which entailed riding herd on the complex machinery of the federal government to get resolution of knotty budget issues, may have come in handy in driving this process as well.

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With neither a vote on any of the panels responsible nor the ability to intervene directly in their deliberations, Lew used the FSOC as a way to manage the process of getting the rule drafted.

The message for the future of financial regulation in the wake of Dodd-Frank is that a heckuva lot depends on who heads Treasury.

It is a setup that can work well, as in this instance, when the appointee at Treasury is a Democrat tasked with shepherding through legislation approved by Democratic majorities in both houses of Congress and signed into law by a Democratic president.

Geithner, however — who started his career as a Republican and only switched his affiliation to Independent when he was working at Treasury in the Clinton administration — was far less invested in implementing Dodd-Frank rules that put restrictio! ns on ban! ks.

As a result, these rules languished in the years following enactment of Dodd-Frank despite regular meetings of the FSOC. There was no bully in the pulpit, allowing the regulators to follow their bureaucratic meanderings and dilly-dally over the rules.

There were some in the debate over Dodd-Frank who wanted an independent chairman appointed to the FSOC for this very reason — to mitigate the role of politics in its actions.

What happens when someone who is ideologically inclined to deregulation becomes Treasury secretary and runs a much looser ship? Almost surely that will lead to fewer regulations and laxer enforcement of those on the books.

But that is perhaps the best way to manage financial regulation in a democracy. Dodd-Frank has created the mechanisms for forestalling future financial crises, but it is up to succeeding administrations — and the voters who put them in office – to use them.

Darrell Delamaide has reported on business and economics from New York, Paris, Berlin and Washington for Dow Jones news service, Barron's, Institutional Investor and Bloomberg News service, among others. He is the author of four books, including the financial thriller Gold.

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