Powell's Fed Sway to Widen in Era of Fewer Dodd-Frank Rules

(Bloomberg) -- In some ways, it was rehearsal for the 2008-09 financial crisis. An investment bank was in trouble. Policy makers were working intensely on a Sunday. The aim: avoid the collapse of a big Wall Street firm when the financial markets reopened.

In the midst of it was Jerome Powell, then an assistant U.S. Treasury secretary who’s now the Federal Reserve’s lowest-profile governor.

The year was 1991. The bank was Salomon Brothers, which had tried to corner a Treasury debt auction using phony bids. On vacation in Cape Cod, Powell, who goes by Jay, conferred by phone with other officials, including Treasury Secretary Nicholas Brady and Fed Chairman Alan Greenspan, and then acted as a go-between with Salomon investor Warren Buffett.

In the end, the firm was spared the worst and survived. Powell “did a fantastic job at Treasury,” Brady said in an interview. “I relied on him heavily.”

As the lone Republican on the Fed’s seven-seat board and someone with in-depth knowledge of how the central bank works, Powell’s influence looks set to increase as President Donald Trump prepares to fill three vacancies. While monetary policy is supposed to stay free of partisan politics, Powell and a majority-Republican Fed Board could leave its biggest mark altering and rolling back financial regulations. Randal Quarles, whom Trump is expected to nominate to be Fed vice chair of supervision, worked with Powell at Treasury.

A former Carlyle Group executive, Powell is even seen as a long shot to replace Fed Chair Janet Yellen or, more likely, Vice Chair Stanley Fischer should Trump not renominate them before their terms expire next year.

Building Block

A former Republican administration official with ties to the White House said the administration views Powell as a foundation upon which it can build. The ex-official declined to be identified so he could discuss private conversations.

A Fed governor since 2012, Powell was intimately involved in the development of some of the very regulations that Trump now wants to dismantle. At times, he was a lone voice cautioning against their potentially adverse impacts on banks and the financial markets. Combined with his financial industry experience, that should serve him in good stead as the nascent Trump team sorts out its strategy -- in spite of criticism that he should have done more to resist the rules in the first place.

Indeed, Powell is already playing a leading role in discussions at the Fed on regulatory reform. “We’re asking what are the fundamental bulwarks of post-crisis regulation, how can we make them more efficient and more effective,” he said in an interview. “And what are the things that are not bulwarks, some of which may prove to be superfluous and some of which may prove to be desirable but require right sizing.”

Banking Head

Earlier this month, he took over as head of the Fed’s banking oversight committee following the departure of Governor Daniel Tarullo, a principle architect of the Dodd-Frank regulatory regime. Powell will do that job until Quarles’s nomination as vice chairman of supervision is approved by the Senate.

A Washington native, Powell now presides over four of the board’s seven committees, handling such unglamorous yet essential duties as overseeing the financial payments system. It’s a nitty-gritty job that has often fallen to Fed vice chairmen in the past.

“He’s a good utility infielder,” said former Dallas Fed President Richard Fisher, referring to a baseball player skilled enough to play many positions. “He has taken on tasks other governors didn’t want and now really understands what makes the place tick.”

As head of the panel that deals with the Fed’s 12 reserve banks, Powell was also caught up in the abrupt departure earlier this month of Richmond Fed President Jeffrey Lacker, who admitted involvement in a 2012 leak of market-sensitive material. Powell declined comment on the issue, or on any desire for a more senior position at the Fed.

Rich Experience

Besides having the private sector know-how that Trump seems to favor, the 64-year-old is -- like many of the president’s appointees -- rich, with assets of as much as $55 million, according to his 2016 financial disclosure form.

Those who know him describe him as non-ideological and pragmatic, with a good strategic sense. “He’s very reasonable, balanced,” said former Atlanta Fed President Dennis Lockhart.

He’s also seen as a team player who can advocate for his views without rancor. “He’s not a person with sharp elbows,” said Harvard University professor Robert Glauber, who worked with Powell at Treasury. “People respected and trusted him.”

Some bankers and administration insiders criticize Powell for not pushing back more forcefully against Tarullo’s aggressive drive to rein in the industry. Trump himself has blasted what he sees as excessive regulation, arguing it’s hurt the economy by discouraging banks from lending.

Rule Concerns

Former Fed officials said that Powell privately questioned the costs of some of the new rules and their potentially adverse impact on individual institutions and the financial markets. In certain cases, he made a difference, though there were limits on what he could do as a single board member.

Powell declined to comment on internal Fed deliberations. He has, though, occasionally taken his concerns public, at one point cautioning regulators against going too far in reining in leveraged lending and at another questioning the efficacy of the Volcker Rule governing proprietary trading by banks. He’s also been out front in spearheading the Fed’s response to the 2014 flash crash in Treasury debt and in overhauling the flawed London Interbank Offered Rate benchmark.

Powell has played his cards close to his chest on monetary policy as well. Along with former Governor Jeremy Stein, Powell was skeptical of the Fed’s third round of quantitative easing launched in 2012, although unlike Stein, he kept his reservations private. As described by former Fed Chairman Ben Bernanke in his 2015 book, the two men were worried about the program’s possible impact on financial stability and the central bank’s ability to exit its easy policies in the future.

Gradual Tightening

Since then, Powell has been supportive of the Fed’s initial go-slow approach to raising interest rates and its recent move to pick up the pace. “We are at or close to full employment, inflation is nearing target and the economy has significant momentum,” he said. “In my view it will be appropriate for us to continue to gradually raise rates.”

A Georgetown University law graduate, Powell spent much of his time in the private sector working in the financial industry, first at investment bank Dillon Read & Co., where he caught the eye of Brady, and later at Carlyle, where he set up the private equity firm’s industrial group.

“Jay was somebody who had experience in both business and in government and also had a legal background,” said Carlyle co-founder David Rubenstein. “That’s a rare combination.”

In 2011, Powell played a key behind-the-scenes role in helping to avert a debt default by the U.S. government while he was working at the Bipartisan Policy Center think tank.

Obama Nomination

Armed with data showing when the government would effectively run out of money, Powell made the rounds on Capitol Hill, trying to convince Republican lawmakers of the folly of allowing Washington to miss making a payment.

His work came to the attention of President Barack Obama’s administration, which later nominated him, along with Democrat Stein, to the Fed board as part of a successful strategy to win the approval of the Republican-controlled Senate.

While some Fed staff initially seemed to underestimate Powell because he doesn’t have a Ph.D. in economics, he soon won their respect as a quick study and hard worker, a former official said. Now, Powell occasionally takes Fed staffers to lunch to explore their views further. He also held a party at his Maryland home this year for departed senior official Nellie Liang that Yellen attended.

He’s “not a self-promoter,” Fisher, the former Dallas Fed chief, said, adding, “I would look to find ways to better deploy him” inside the central bank.

To contact the reporter on this story: Rich Miller in Washington at rmiller28@bloomberg.net.

To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, Sarah McGregor