Tom Williams/CQ Roll Call via AP Images
Gary Gensler, left, then chairman of the Commodity Futures Trading Commission, prepares to testify before a Senate committee in July 2012.
Financial regulation quietly suffered countless blows in the Trump era. The one significant piece of bipartisan legislation during Trump’s tenure was a hodgepodge of deregulatory schemes (including raising the threshold for significant regulation of commercial banks to those that hold $250 billion in assets) that has since kicked off a new merger wave. At the regulatory agencies, numerous Dodd-Frank rules to safeguard the financial system were gutted, from capital standards to stress tests to so-called “living wills” (where banks must lay out how to dismantle themselves in the event of trouble) to the Volcker Rule, which was intended to restrict investment gambling with depositor funds but during the Trump regime was effectively rendered inert.
Add to those the rescinding of fair-housing rules to prevent discrimination, the abandonment of “ability to repay” requirements for payday lenders, the establishment of a work-around for states that disallow high-cost consumer loans, the effective repeal of the Community Reinvestment Act through relaxed enforcement, exemptions to designating giant asset managers and insurers as systemically important financial institutions (SIFIs), new debt collection rules that allow a borrower to be called seven times per week per debt, and way too many more to count. The House Financial Services Committee put together 31 pages’ worth of bad Trump-era rulemaking that should be rescinded.
In other words, President-elect Biden’s choices for financial regulators will be busy. But outside of Treasury secretary–designate Janet Yellen—who as Federal Reserve chair largely deferred to staff and colleagues on financial regulatory issues—none of these people have been chosen yet. These decisions will signal how much of a change in direction we will see among financial regulators: something transformative, or merely performative.
THE OFFICE OF THE COMPTROLLER OF THE CURRENCY is the main national bank regulator. OCC’s prior insistence on preempting state regulations for the big banks it oversees has been a powerful shield. And it has done little in its own right to put meaningful sanctions on institutions that fail the public; it recently declined to sanction JPMorgan Chase for erroneously charging overdraft fees on 170,000 customers. In addition to enforcing regulatory compliance and writing bank rules, OCC has recently gotten involved in the financial technology, or fintech, space, creating a special bank charter for financial-services startups. While litigation has tied this up, acting OCC chief Brian Brooks has pushed forward with a version of the charter anyway for payment companies.
How OCC resolves this dispute, and how it ensures that chartered banks do right by all of their consumers, will be the task before the next leader. Two names are in the running: University of Michigan professor Michael Barr and University of California, Irvine professor Mehrsa Baradaran. Both are part of the Biden transition agency review team for the Treasury Department; OCC is technically part of Treasury. (Full disclosure: Baradaran is a Prospect board member.)
Barr served as a key deputy to Treasury Secretary Timothy Geithner during the Obama administration, and before that an assistant to Robert Rubin in the Clinton Treasury Department. He is now, fittingly, the Joan and Sanford Weill Dean of Public Policy at the University of Michigan. Sandy Weill was the CEO of Citigroup who literally had a trophy in his office with a plaque reading “Shatterer of Glass-Steagall,” the Depression-era separation between investment and commercial banks. (Weill now supports reinstitution of Glass-Steagall.)
During the Dodd-Frank debate, Barr served as the liaison between Treasury and Congress, and Hill aides from that time do not have positive memories, calling him “deeply arrogant” and “hostile.” There’s a famous anonymous quote from New York magazine about how an amendment from Sens. Sherrod Brown (D-OH) and Ted Kaufman (D-DE), who’s currently running the transition, “would have broken up the six biggest banks in America,” but Treasury came out against it so it died. Barr “100 percent” gave that quote, according to one source. Barr’s role was to knock out progressive ideas in financial reform, including taking a run at the Volcker Rule, which the White House initially proposed. (Volcker did end up making it into the law.)
What did Barr value? The Consumer Financial Protection Bureau, which he helped develop and safeguard. There’s a sense from some observers that Barr was carrying Treasury’s water during Dodd-Frank and his real drive is on consumer issues, where he has been thoughtful. That would serve Barr well at OCC. “The worst things that office has ever done has been about consumer stuff,” said one observer familiar with the process. That said, OCC deals with systemic risk issues as well, and plays a role in rulemaking. And financial reformers have lingering doubts about Barr.
Meanwhile, Baradaran has written extensively about financial inclusion and closing the racial wealth gap. She would be expected to roll back changes to how OCC monitors compliance for the Community Reinvestment Act to ensure lending to low-income communities of color. Moreover, on fintech she would probably look to how these alternative financial providers would treat Black and Latino people shut out of traditional financial systems. Meanwhile, Barr is an ally of Georgetown Law professor Chris Brummer, a fintech evangelist who literally founded D.C. Fintech Week and hosts a fintech podcast; Barr blurbed his 2011 book Soft Law and the Global Financial System. Will the wonders of technological innovation be used to expand financial access, or real investments in historically neglected people? That’s what’s at stake with the OCC selection.
THE SECURITIES AND EXCHANGE COMMISSION has been the subject of fevered speculation ever since current chair Jay Clayton announced he would step down at the end of the year. Allison Herren Lee, the Democrat on the commission with seniority, is expected to replace him as acting chair, although as of last week, nobody at the transition had even talked to her about it, according to sources with direct knowledge. And who will take Clayton’s place permanently on the commission is also up in the air.
There’s a lot to be done at the SEC, which sets rules for public companies to follow and enforces the securities laws. Corporate-friendly performance at the SEC has led to undermining even no-brainer ideas like making oil and gas companies disclose payments to foreign governments. But there’s more to do than just reversing Trump policies.
In a meaningful sense, the SEC sets the rules for capitalism; whether companies must disclose the diversity in their workforce, the compensation of their officers relative to their rank and file, whether they must account for climate risk, and so much more. Disclosures can lead to real change, but deregulation has led to a swollen private market (now bigger than the public markets) and less transparency about corporate America. SEC aggressiveness is a powerful way to not only police markets but hold companies accountable to their investors and to the public good.
The Washington Post has reported two finalists for the chair: Gary Gensler, former head of the Commodity Futures Trading Commission, and Preet Bharara, the resistance hero and former U.S. attorney for Manhattan. I’ve been told that Bharara doesn’t want the job, and that’s a good thing. The model of a prosecutor without rulemaking experience has been tried; it was the profile of Mary Jo White, one of Obama’s SEC chairs, who was a miserable failure at the job.
There are several other names involved in the discussion. Lee could simply convert from acting chair to a permanent chair position, and her predecessors on the commission, Kara Stein and Rob Jackson, both could be chosen to come back. In addition, Erica Williams, an African American former staffer in the enforcement division who worked for Mary Schapiro and White before moving to the Obama administration, has also made known that she’d take the job if offered. Williams, now at BigLaw giant Kirkland & Ellis, also comes out of the enforcement side when there are real policy questions to be dealt with, and there are deep concerns about her being a centrist institutionalist.
Gensler, who is running a financial-policy landing team for the Biden transition, has some compelling attributes. Despite coming out of Goldman Sachs, he surprised even his appointers at the CFTC with aggressive stances on derivatives, and he has earned a reputation as a reformer. He also has the fight to take on powerful interests.
In a meaningful sense, the SEC sets the rules for capitalism.
But Gensler may have trouble getting confirmed. In addition to pro–Wall Street Republicans, Sen. Bernie Sanders (I-VT) held up his CFTC nomination and clashed with him on reining in oil speculators blamed for driving up prices in 2008. Several members of Congress also held Gensler responsible for the collapse of MF Global, the hedge fund that raided customer money to cover a series of bad derivative bets. In particular, Sen. Jon Tester (D-MT) was furious at Gensler, calling for him to be fired for the CFTC’s inaction.
Jackson, who some rumors indicate is one of two finalists for the position (along with Gensler), has his champions as a damn-the-torpedoes hard-charger. Others have negative impressions from him leaving the SEC to return to teaching at NYU before he had to leave; this could have led to one fewer Democrat on the commission for an extended period, though the position was filled. More seriously, there are concerns that execution was lacking during his tenure on issues where Democrats were trying to prevent certain regulations from being completed. The sense is that Gensler worked better with outside groups to effectively advance policies, though to be fair, Gensler had the votes during the Obama years, in a way Jackson never had.
Lee, who reformers indicate has performed ably at the commission, could prove a consensus choice. But the lack of communication with the transition doesn’t bode well for that option, at least not at the moment.
