AP Photo/Win McNamee
Sometime this month, the Senate is expected to grill President Obama's pick for Treasury secretary, Jack Lew, who if confirmed will replace outgoing secretary Timothy Geithner. As the president's chief of staff, Lew has been influential in the budget battles President Obama fought with House Republicans in the past year and has a deep knowledge of how government spending works. Conventional wisdom is that the president chose Lew to have a strong ally as the White House battles with congressional Republicans over spending and taxes. But with only a short stint at Citigroup amid a life of public service, there isn't a deep record on what he thinks about financial reform.
Nevertheless, the Treasury secretary will be responsible for the overhaul of the legal and regulatory framework that governs the financial sector. The incoming Treasury secretary will have three chief responsibilities: complete the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, determine how many of the new parts will work together going forward, and parry with congressional efforts to repeal parts of that law.
Writing the complicated rules for Dodd-Frank is a process that is largely being carried out at the numerous, independent regulatory agencies. Some of these agencies, like the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), aren't part of the cabinet and don't report to the president or the Treasury secretary. But certain provisions of the scheme Dodd-Frank sets in place require the secretary to coordinate and work directly with these agencies. Take, for instance, the Volcker Rule, which is designed to split speculative investing from traditional banking (in other words, banks are not allowed to engage in trading unless it is part of essential client services). How effectively this rule will be in protecting consumers from risky trading ventures depends on where exactly the sometimes murky lines are drawn between trading and services. Though this rule, which will be finalized this year, is being written at five different agencies, Treasury acts as a coordinator.
Beyond dealing with the specifics of rule-writing, Treasury will be responsible for shaping the focus and culture of newly created agencies. One such agency is the the Financial Stability Oversight Council (FSOC), a new regulatory group designed to look for and respond to risks across the financial system. The FSOC consists of 10 voting members, all regulators, with the Treasury secretary acting as chair. One of the FSOC's primary tasks in the next year is determining which financial institutions will receive heightened oversight. Most of the obvious large financial firms will be designated "systemically important financial institutions" or SIFIs. But whether or not other types of firms, such as insurance companies, qualify for these enhanced regulations will depend on how the FSOC rules in the upcoming year. The incoming Treasury secretary will have considerable influence in determining the scope of the new regulatory regime.
Dodd-Frank also created a brand new organization within the Treasury department. The Office of Financial Research consists of two separate branches: a data center with extensive authority to collect financial information and a research team tasked with carrying out analyses. The office can act as a special think tank capable of advising regulators, complete with the legal power to gather necessary data. The Treasury secretary will ultimately make the calls on whether this office thrives. If he or she equips it with top-quality people and adequate funding while tasking it with important missions, it could become another important part of the regulatory world.
Lew will also have to defend the progress already made on financial reform. This will be the year the financial industry attempts to legislatively change Dodd-Frank through innocuous-sounding "technical amendments." These amendments could, in theory, clarify the requirements Congress gave the regulatory agencies. They could also result in large-scale deregulation even before new rules have been given a chance to work. Some of these "technical" changes could be dramatic. For instance, the focus of reforming the multi-trillion dollar derivatives markets has been making the special exchanges and clearinghouses on which these derivatives are traded more transparent. However, these rules could become useless if the definition of what clearinghouses and exchanges are is made too weakly to ensure reform. Another target of attack could be the Consumer Financial Protection Bureau (CFPB), which was purposely designed to be run by a single director and funded through the Federal Reserve. Yet critics of the agency want to repeal these two features, making the agency far less effective even before it has really built its institutional identity. This is where Jack Lew will be instrumental. He's been able to maneuver around House Republicans during budget deals while being an advocate for the programs he wants to see succeed.
Beyond the rollout of financial reform, Treasury will set the tone on what else will be on the financial-reform radar. The role of the government in the housing market will come up again as the housing market recovers, and the Treasury secretary will be the administration's point person on this. With budget concerns on everyone's mind, it would also be ideal to have someone defend various financial taxes as a way to link increasing revenues with financial stability. A tax on financial transactions would be a way to deal with the large high-frequency markets and is favored by many European countries; the administration has pushed for taxes on financial firm size and leverage, designed to nudge firms to a more manageable size. Whether either of these are highlighted in the budget deals going forward will be up to the secretary.
One advantage of having a Treasury secretary who has more experience dealing with budgets than the financial sector is that he or she is less likely to get in the way of the current work being done-Obama has not nominated someone with longstanding ties to Wall Street. On the other hand, Lew will play a critical role in shaping the Dodd-Frank regulatory regime, and his lack of a track record may be worrisome to some critics. The question of his experience is just one of the concerns he'll have to answer to when the Senate begins to vet Lew for the cabinet.
