Trump's Pick for Federal Reserve's Top Regulator Just Won This Battle - TheStreet

As the Federal Reserve loses one vice chairman, it's getting closer to gaining another.

The Senate Banking Committee recommended in a split vote on Thursday, Sept. 7, that the full chamber confirm Randal K. Quarles as the U.S. central bank's vice chairman for supervision. If the chamber acts before Oct. 13, when Vice Chairman Stanley Fischer's resignation takes effect, the Fed would maintain at least a four-member board since its chair and vice chairs also serve as governors.

Otherwise, just three of the board's seven governorships would be filled. All of the governors are members of the 12-person Federal Open Market Committee that sets monetary policy, so the excess vacancies would shift the balance of power even further toward the five regional Fed presidents who serve on the panel, as well as heighten uncertainty about the pace of interest-rate adjustments.

The departure of Fischer, 73, "highlights the need to quickly confirm Mr. Quarles so that the seven-member board can maintain at least four members," Sen. Mike Crapo, the Idaho Republican who chairs the banking committee, said before Thursday's vote.

Even so, Quarles' portfolio as head of the Fed's regulatory programs, handled on a de facto basis by Governor Daniel Tarullo before his departure earlier this year, would be vastly different from that of Fischer.

A monetary policy expert appointed by former President Barack Obama, Fischer had served at the World Bank and the International Monetary Fund and is credited with teaching former Fed Chairman Ben Bernanke and European Central Bank President Mario Draghi during his 22 years as a professor at the Massachusetts Institute of Technology.

Fischer "contributed invaluably to our monetary policy deliberations," Fed Chair Yellen said in a statement on Wednesday. "We will miss his wise counsel, good humor, and dry wit."

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Quarles, 60, is managing director at family-investment specialist Cynosure Group and was the undersecretary for domestic finance in former President George W. Bush's Treasury Department prior to the 2008 financial crisis, according to BoardEx, a relationship-mapping service of TheStreet.

It was his performance in that role that spurred criticism from some Democrats on the Senate Banking Committee, though he still won 17 out of 23 votes.

Neither Quarles nor Joseph Otting -- whom the committee recommended confirming as Comptroller of the Currency on Thursday -- are appropriate choices for "these important roles as our financial watchdogs," said Sen. Sherrod Brown of Ohio, the highest-ranking Democrat on the committee.

Quarles' role at Treasury was to "coordinate oversight of the finance industry," Brown noted. "Many of his statements leading up to the crisis were far too credulous when it came to industry claims that we need not worry about a credit bubble."

The crisis, which began to develop as early as 2006 when housing prices dipped, eventually led to widespread defaults by borrowers with poor credit scores who had obtained home loans they couldn't afford to repay.

That rendered mortgage-backed securities, which lenders had created to book profits on the loans immediately while avoiding risk, impossible to value.

Wall Street firms holding billions of dollars in such notes were forced under existing regulations to mark down their worth, which dragged down their stocks and eventually pushed Lehman Brothers Holdings Inc. into bankruptcy.

The collapse of Lehman, the fourth-largest investment bank in the U.S., froze global credit markets, and the ensuing turmoil wiped out close to half of the stock market's value while forcing the government to spend billions of dollars on bailouts to prop up the financial system.

"I'm not confident that Mr. Quarles took to heart the costly lessons of the financial crisis," Brown said. "He seems far too ready to relax the rules for Wall Street, and those that protect consumers. It's pretty stunning that he was in the middle of it and didn't seem to learn those lessons."

Crapo, however, said that Quarles is well-qualified for his prospective post and "up to the challenge" of complex duties with wide-ranging impacts -- an opinion Quarles worked to validate during a July hearing before the same committee.

While Quarles acknowledged that his post would give him "a particular role in ensuring the safety, soundness and efficient operation of our financial system" and that post-crisis policies had made it safer and more resilient, he said "some refinements will undoubtedly be in order."

Tarullo, one of the principal architects of those policies, indicated as much himself in an April speech in which he said "'there are clearly some changes that can be made without endangering financial stability,'" Quarles noted.

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It's an attitude supported by both President Donald Trump, who argued during his campaign that excess regulation since the crisis had hindered U.S. economic growth, and the country's largest banks. Companies from JPMorgan Chase & Co.  (JPM) - Get Report to Citigroup Inc. (C) - Get Report and Bank of America Corp. (BAC) - Get Report would stand to benefit from looser rules.

"The key question," Quarles said, "will be ensuring that, as we continue to refine the system over time, we do so while maintaining the robust resilience of the system to shocks." 

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