by Neil Irwin
Even though the regional reserve banks had nothing to do with the Wall Street bailouts, they had the most to lose if anti-Fed sentiment led to stripping the institution of its oversight power. Regulating banks was what Federal Reserve branches spent most of their days doing. Without that responsibility, they would have little to do besides the nuts-and-bolts work of providing cash to commercial banks in their districts. The reserve bank presidents always couched their arguments in terms of what was best for the financial system overall, but the politically savvy could see that the presidents had a great deal at risk.
The Fed’s point man on bank regulation in Washington was Daniel Tarullo, an acerbic law professor appointed to the Fed Board of Governors by Obama. If Hoenig’s world was one of small-town banks lending to their local farmers and factory owners, Tarullo’s was one of trips to Basel to negotiate capital standards for the likes of Goldman Sachs. Hoenig feared that Tarullo and the Board of Governors would happily throw the smaller banks overboard if that was what it took to keep oversight of the giant banks. “I got the sense that they weren’t going to interfere, but also that this wasn’t their issue,” said Hoenig, referring to his colleagues in Washington. “Everyone is influenced by their environment, and theirs is international and Wall Street, so that’s where their focus is.” Hoenig and a handful of the other reserve bank presidents were eager to make their way to Washington to make sure Bernanke, Geithner, and Tarullo didn’t sell them down the river in order to strike a deal with Dodd.
The forces fighting on behalf of the Fed amounted to a powerful set of interests, though not all precisely aligned: Bernanke and his colleagues at the Fed Board of Governors; Geithner and the Obama administration; the private banks large and small; and the reserve banks around the country with their own business and political connections. The question, entering the financial reform debate in 2009, is whether that would be enough to conquer the deep-seated animosity to an institution that was so deeply unpopular on Capitol Hill.
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When President Obama took office in early 2009, the conventional wisdom was that Bernanke would be a one-term Fed chair. Not only had he failed to prevent the worst recession in modern times, but he was a Republican working in a Democrat-led Washington. There was frustration among Democrats that Republican appointees had held the Fed chairmanship continuously since 1987, and there was even an obvious Democratic candidate for the job.
Larry Summers was notorious for bulldozing over his intellectual opponents, and he had been nudged out as president of Harvard University after making impolitic remarks about women in the sciences. But he was a first-rate economist, a former treasury secretary, and the obvious pick for Fed chair if Obama wanted to seek a change when Bernanke’s four-year appointment ended in January 2010. In assembling his economic policy team at the start of his administration, Obama had asked Summers to join as his top economic aide in the White House. It was a way for Obama to put a seasoned hand in the West Wing at a time of economic crisis. And even though it was a demotion, really, for a former treasury secretary, it was a way for Summers to position himself as a loyal soldier deserving of the Fed appointment.
Through the early months of the Obama administration, Bernanke maintained polite relations with the new president. But theirs was no deep personal connection: They met privately only four times during those first six months. Meanwhile, Bernanke took a series of steps—both symbolic and substantive—to try to instill confidence in the nation’s economy. In March 2009, he granted 60 Minutes the first television interview with a Fed chairman in twenty-two years, and pronounced on the air that there were certain “green shoots” visible signaling an economic recovery. In July, he gave a town-hall-style meeting at the Kansas City Fed; it was broadcast on PBS NewsHour over three consecutive evenings. His aggressive monetary policy moves—zero interest rate policy and $1.75 trillion in bond purchases that had been announced to that point—seemed to be having their desired impact of helping the U.S. economy pull out of its collapse. The recession, it would later be declared, officially bottomed out in June 2009.
Some in the Obama administration even viewed Bernanke’s actions—particularly the public appearances—as part of a not terribly subtle campaign to position himself for reappointment.
Obama’s decision on whom to appoint to the Fed chairmanship was a closely held one within the White House, confined to the president, his chief of staff Rahm Emanuel, and Geithner. This put Geithner in a difficult spot: Summers, as a Treasury official in the 1990s, had plucked Geithner from obscurity and promoted him into the department’s highest-level job on international economic matters. Bernanke, meanwhile, was Geithner’s partner from the dark days of the crisis, and they had remained friendly since.
But the reality was, by the time Geithner had to make a recommendation and Obama had to make a decision, eating breakfast weekly, there wasn’t much of a decision to make. Bernanke had proved he would do whatever was necessary to keep the economy from collapsing. He’d won the confidence of Wall Street; in a survey of forty-seven bank economists by the Wall Street Journal, all but one said he should be reappointed. The senators who would have to vote to confirm him mostly respected him, even the ones who had objections to the Fed as an institution.
Summers could certainly do the job, but it wasn’t clear that he could do it any better than Bernanke—and Summers’s outsized personality risked making him less effective. After all, a Fed chairman doesn’t make policy on his own, but by guiding a committee toward consensus, and Summers had never been much of a consensus builder. And Summers’s service in the Obama White House, coupled with his difficult personality, meant that getting him confirmed in the Senate could be a challenge. Republicans would likely oppose him, worried he might be influenced by the White House once at the Fed. Even some Democrats would likely oppose him, bothered by his lifetime of controversial statements and role in deregulating the financial system in the 1990s.
With the economy fragile, Geithner and Obama went for the safe choice. At one of Bernanke’s regular weekly meetings with Geithner in June, the treasury secretary posed a question: Would you like the president to consider appointing you to a second term? Yes, Bernanke said, he would. The Fed chief was exhausted, and on some level would have been content to go back to Princeton and a quiet academic career. But he wanted to complete what he’d started in addressing the crisis, and he wanted the implicit endorsement of his actions that reappointment would convey. The Wednesday evening before the 2009 Jackson Hole conference was to begin, Bernanke was summoned to the White House—after the “lid” had been put on, meaning there would be no new announcements that evening, so the White House press corps could go home. That helped make it less likely he would be seen entering the White House at a time when the world was on edge about whether he would be appointed. The meeting lasted less than ten minutes, with Obama, Bernanke, and Geithner in the room. The president praised his work and asked him to accept a nomination for another term—but to keep it secret until they could announce it at a time to their political advantage. Obama and Bernanke still had no special rapport, but competence and credibility were enough to win Bernanke reappointment.
At Jackson Hole that year, the question of whether Bernanke would be reappointed was a frequent topic of conversation over coffee breaks and meals. The Fed chair already knew the answer, but he didn’t give any hints. The announcement took place the following week, when the president was on vacation in Martha’s Vineyard. Unsure of how to dress when appearing with a vacationing president, Bernanke wore his usual dark suit; the president was without jacket and tie. When they both arrived at the high school gymnasium that was serving as a holding pen for the White House press corps, they each adjusted in order to have more or less the same look: Bernanke removed his tie; Obama put on a sport coat.
“As an expert on the causes of the Great Depression,” Obama said, “I’m sure Ben never imagined that he would be part of a
team responsible for preventing another. But because of his background, his temperament, his courage, and his creativity, that’s exactly what he has helped to achieve. And that is why I am reappointing him to another term as chairman of the Federal Reserve.”
Assuming, of course, that the Senate would confirm him. The Banking Committee met on December 17 to decide whether to advance Bernanke’s confirmation to the full Senate—just six weeks before his term was to expire.
Chris Dodd, for all his complaints about the Fed’s performance before the crisis, was full of praise for its chief. “I believe that Ben Bernanke deserves substantial credit as chairman of the Federal Reserve for helping us navigate those waters,” he said, “not with perfection, but certainly, I think, stepping up at a critical time in our nation’s history with some very wise leadership that benefited our nation.”
Then it was Richard Shelby’s turn. “Over the years we have enacted a number of laws which demonstrated our confidence in [the Fed],” he said. “We trusted the Fed to execute those laws when deemed prudent and necessary. I fear now, however, that our trust and confidence were misplaced . . . I strongly disapprove of some of the past deeds of the Federal Reserve while Ben Bernanke was a member and as chairman, and I lack confidence in what little planning for the future he has articulated.”
As the remaining senators stated their views on Bernanke, one by one, a trend emerged. Almost to a person, and with varying degrees of politeness, the Republicans emphasized the negative. Jim Bunning of Kentucky, the only senator to have voted against Bernanke’s confirmation four years earlier, noted that the day before Time magazine had named Bernanke its “Person of the Year.” “Chairman Bernanke may wonder if he really wants to be honored by an organization that has previously named people like Joseph Stalin twice, Yasser Arafat, Adolf Hitler, the Ayatollah Khomeini, Vladimir Putin, Richard Nixon twice, as their person of the year,” he said. “But I congratulate him and hope he at least turns out better than most of those people.”
All but one Democrat on the Banking Committee voted in favor of the Fed chair—but only four of ten Republicans did. Although his confirmation had moved to the full Senate floor, Ben Bernanke had yet another fight on his hands.
Dodd’s plan of targeting the Fed’s powers was attracting some powerful opponents, but in late 2009 its political logic remained sound. Shelby was a wily negotiator, coming across as noncommittal even when consensus seemed possible and never revealing his bottom-line demands. Dodd’s goal of a bipartisan financial reform bill at times seemed to be on the verge of coming together, at others on the verge of falling entirely apart. Whatever impulse Shelby had to collaborate with Dodd counted for little next to the Republican Party’s overarching legislative strategy: to oppose all major initiatives of the Obama administration and, by blocking some of them, portray the president as ineffectual. Dodd was well aware of this, but he also knew that Republicans didn’t want to be seen as defending Wall Street interests.
After months of negotiations that hadn’t really gone anywhere, Dodd was ready to force the issue. On November 10, 2009, he introduced a 1,139-page bill to the Senate Banking Committee, figuring Shelby and the Republicans would have either to negotiate in earnest or vote against reform. The bill called for creating a new consumer protection agency to regulate financial products such as mortgages and credit cards. It also proposed stripping the Fed of the power to oversee banks and granting it to another new regulator. It even called for the selection of regional Fed presidents to be made by presidential appointees in Washington rather than commercial bankers and businesspeople in the reserve banks’ districts. Dodd’s was a different model of what the Federal Reserve should be: Instead of an institution that would oversee and serve as a backstop to the financial system, as it had in 2008, the Fed was to focus on monetary policy and not much else.
At the markup hearing to begin revising the bill in mid-November, Shelby, rarely looking up from a twenty-six-hundred-word statement, proceeded to attack almost every aspect of Dodd’s bill. The bill’s consumer protection agency would create “a massive new bureaucracy.” Its consolidation of bank regulation, meant to entice Shelby and other Republicans, would “place all banks—state and federal—under a single, mammoth federal regulator.” Dodd sat listening, his finger on his temple. Shelby didn’t definitively rule out any cooperation on a bill. But he also didn’t sound eager to hammer out an agreement. The dream of a bipartisan deal was fading with each new paragraph of Shelby’s attack.
In the House, where parliamentary rules make it far easier for a majority to get its way, things were proceeding much faster. Barney Frank was working on a bill that would give the Fed more power over the banking system rather than less, in line with Bernanke and Geithner’s preferred approach. But there was one component of the bill that reflected the House’s populist wrath: Frank and North Carolina congressman Mel Watt put forward an alternative to Ron Paul’s Audit the Fed proposal that would add new disclosure requirements for the central bank but would still prevent Congress from mucking about in monetary policy or the Fed’s transactions with foreign central banks.
Paul was furious. “This is the bill that would allow the people to win over the special interests on Wall Street, as well as with the big banks,” he argued in committee. The American people “are sick and tired of secret government and government out of control and Congress passing TARP funds and on and on, and nobody knowing what happened.”
In his push to restore Audit the Fed, Paul joined with Alan Grayson, a first-term Florida Democrat and firebrand liberal populist who assailed the Fed with as much ferocity as the Texas Republican. But while support for Audit the Fed was bipartisan, House Democratic leaders were sympathetic to arguments from Bernanke and Geithner that what was being sold by Paul and Grayson as greater accountability and oversight was really just increased political control over monetary policy. That didn’t mean they could contain the momentum in Congress, however, where anger at the power and secretiveness of the Fed was too powerful to overcome reservations. The Paul-Grayson amendment passed by forty-three votes to twenty-six in the Financial Services Committee on November 19 and was part of the overarching Wall Street reform legislation the House passed three weeks later.
By the start of 2010, Dodd’s strategy for reforming the financial system was in trouble. Shelby was as antagonistic to the Fed as ever, but negotiations with him over a broader bill weren’t progressing, held back, Dodd’s aides told him, by Shelby’s ambition to rise within the Republican Party.
Dodd had to recalibrate his goals. He still wanted to cut back on the Fed’s powers, but without the support of Shelby and the conservative Republicans he would need the vote of every single Democrat and a handful of centrist Republicans. And that was looking unlikely. Several members of his own party, including powerful New York senator Chuck Schumer, had already sided with Geithner and the Obama administration, which was dead set against taking the Fed out of the business of regulating Wall Street.
So Dodd started pushing the next best thing: keeping commercial banks with assets of $50 billion or more—the top thirty or so in a nation with eight thousand of them—under the supervision of the Federal Reserve while moving smaller institutions to a new regulator. Geithner and the administration seemed open to negotiating that approach. It would serve the treasury secretary’s first-order goal of ensuring that the largest and most complex banks—not coincidentally, the same ones he had regulated as New York Fed president—would remain under the Fed’s umbrella. Geithner had even mentioned $50 billion as a possible threshold in his first meeting with Dodd’s staff. Bernanke was more opposed to the possibility. When discussing the oversight of big banks in private meetings with senators, he spoke in dire warnings: Without oversight of the largest financial firms, the Fed couldn’t do its job as a central bank properly, and the entire U.S. economy would be at grave risk. In private meetings, lawmakers said, he didn’t speak of losing small bank
oversight in quite the same dire terms. But he said repeatedly that he viewed the insight the Fed had into smaller banks across the country as essential to understanding the workings of an economy with 300 million people spread across the continent. A Federal Reserve system that didn’t oversee smaller banks, Bernanke argued, would be at even greater risk of seeing the world only from the vantage point of Washington and Wall Street.
Some of the reserve banks were distrustful, fearful that their colleagues in Washington would too readily sell out the Fed’s authority over small banks as a bargaining chip to ensure victory on other priorities. Kansas City Fed president Tom Hoenig and Richard Fisher, the politically connected president of the Dallas Fed, took it upon themselves to ring alarm bells among their fellow presidents in the Fed system.
In phone calls and at the Federal Reserve’s Conference of Presidents—a meeting at which the twelve heads of the regional banks discuss operational matters—Hoenig and Fisher delivered a stark message to their less politically attuned colleagues: The threat to our institution is real. We cannot count on the Fed governors in Washington to protect us. So deploy every political connection you have to try to make our case to Congress. “We need to be involved in supervision, and if you think it’s important, do something about it,” Hoenig later recalled telling his colleagues.
Each reserve bank had a twelve-member board of directors made up of private bankers, businesspeople, and other community representatives. These tended to be well-off, politically connected people—and there was an army of 144 of them in every corner of the country. Many of the reserve bank presidents asked their board members to make calls to lawmakers with whom they were friendly to encourage them to protect the Fed. Some called local bankers’ associations to ask them to lobby as well. (Others viewed this as an inappropriate cozying up to the industry they regulated.) The reserve bank presidents also began visiting Washington to meet with lawmakers to press their case. Some who were new to their jobs or had never been politically attuned met with legislators from their districts for the very first time, economists learning how to be lobbyists. By early 2010, Hoenig was a near-constant visitor to Washington, packing long days of meetings with members of Congress. He and his staff were sufficiently new to the art of lobbying that they often underestimated how long it would take to get from office to office among the complex of seven buildings where the legislators work.