Elizabeth Warren subjected Fed chairman Janet Yellen to one of her fiercest interrogations ever in Congressional hearings yesterday. The Massachusetts senator has taken note of how the Board of Governors’ general counsel and Greenspan-era holdover Scott Alvarez exerts outsized influence at the Fed, to the detriment of regulatory reform. As Matt Stoller wrote in an in-depth post on Alvarez last October:
Alvarez is a regulatory specialist who controls the bulk of the legal expertise in the Fed, whereas Yellen is a macroeconomist who doesn’t know regulations that well. Alvarez’s institutional opponent is Fed Governor Dan Tarullo, and Tarullo as a single Governor doesn’t have the resources to fight the entire Fed legal staff. So Alvarez is likely to continue to win. In other words, what Yellen really needs to do to put her stamp on the Fed is to fire Alvarez and replace him with someone who actually sees the legal mandate of the Fed in the context of the institution’s recent failures. Alvarez is simply too wedded to Greenspan’s legacy to do so; he is incapable of recognizing the needs of today’s Fed.
As we noted then:
Yellen has said she wants to make financial stability as important a priority of the Fed as monetary policy. That means, among other things, being willing to regulate banks. Scott Alvarez is too deeply invested in an out-of-date world view to carry that vision forward. If Yellen intends to live up to her word, Alvarez has to go.
As you’ll see in the must-watch video below, Warren cuts Yellen absolutely no slack, refusing to allow Yellen to temporize to evade Warren’s questions. She first brings up Alvarez’s failure to brief Warren and Elijah Cummings as requested last year on an apparent Fed failure to investigate a leak of FOMC information that moved markets. She then moves into a no-win incident from the perspective of the Fed, of Alvarez dissing key sections of Dodd Frank at a recent American Bankers Association conference and stating that they needed to be redone.
It is hard to emphasize strongly enough how serious those remarks were. They amounted to two things: first, the professedly-apolitical Fed throwing its weight in favor of banks, against the public interest, and second, the Federal Reserve opposing the law of the land. The latter is a clear message to financial firms that they can ignore the provisions of Dodd Frank that Alvarez discussed (and potentially others) safe in the knowledge that the Fed has their back.
As you see, Yellen appears to capitulate before the onslaught of Warren’s questions, stating that she and and Fed were “not seeking to alter Dodd Frank at this time…we’re not seeking to change the law.” And Warren’s closing remarks are a clear message to Yellen that she had better leash and collar Alvarez.
So what did Yellen do? The very same day, she effectively repudiated her Congressional testimony and threw her weight behind Alvarez. From American Banker (hat tip Michael Hudson):
After the hearing, Yellen later expressed faith in Alvarez in a written statement. “My colleagues and I depend, with confidence, on Scott Alvarez’ expert advice and counsel,” Yellen said. “He is a dedicated public servant who is committed to thoughtful public policy.”
Understand what this amounts to. By immediately issuing a statement supporting Alvarez, Yellen is sanctioning his pro-bank, anti-Dodd Frank conduct. In any organization of the stature of the Fed, you cannot have staffers defying the policy of the institution. So Yellen is effectively saying that her lip service to Dodd Frank before Warren was bunk, that she stands fully behind Alvarez and his long history of pushing aggressively for bank deregulation. More of Alvarez’s mindset from Matt Stoller’s post on Alvarez’s testimony in AIG bailout trial:
Alvarez helped draft the law formally eliminating Glass Steagall, the Gramm-Leach-Bliley Act. He alludes to helping Citigroup merge with Travelers, which prompted the statutory shift. What’s more interesting than what he did is how he sees his actions today. After all, a lot of people in hindsight acknowledge they erred. Not Alvarez. He argues that the repeal of Glass-Steagall had nothing to do with the crisis.
His evidence? Well he claims that Lehman and Bear were the primary culprits in the housing crisis, and that neither entity took advantage of the end of Glass Steagall. By contrast, those banks that did take advantage of it, such as JP Morgan and Bank of America, well they “did rather well.” These banks were “not the cause of the crisis” and they were “not a casualty, either.” He talks about sick dog Citigroup, and says that we shouldn’t refer to “Citi as if it failed. It hasn’t. It survived, unlike Bear Stearns, unlike Lehman, unlike WaMu, Wachovia, etc.” He speaks as if Citi had no support from the government whatsoever. It was a remarkable performance, reminiscent of what French diplomat Talleyrand once said about the Bourbons, “They had learned nothing and forgotten nothing.”
Obviously the end of Glass-Steagall in 1999 was more of a formality than anything else. American Depression-era banking regulations had been chipped away since the 1960s, with an accelerated deregulatory mindset taking off just as Alvarez’s career began to flourish in the 1980s. But to Alvarez, the removal of the speed bumps in the U.S. financial system is simply irrelevant to the series of crises we’ve been experiencing since the 1970s. They are perhaps just acts of God….
Alvarez is completely unapologetic about the Federal Reserve refusing to use its authority to stop false and deceptive practices in the mortgage market prior to the crisis. He doesn’t mention the linkages of mortgage-backed securities to the financial system via derivatives, the gaming of the capital markets, or problems with banker compensation that reward short-term gains while socializing losses. Alvarez’s arguments reflect a pure and unadulterated deregulatory mindset bequeathed to the central bank by Alan Greenspan.
Many Naked Capitalism reader were disappointed to learn that Warren was not supporting the latest Audit the Fed bill. Despite her fierce interrogation of Yellen, if anything Warren has been giving the new Fed chair the benefit of the doubt in light of her apathy about regulatory reform. Indeed, it was the Fed, and likely Alvarez, that undermined Warren’s fight to preserve provisions of Dodd Frank that would restrict taxpayer-backstopped banks from engaging in what is colloquially called casino banking. We explained why many of the Vichy Left, such as Paul Krugman, failed to support Warrens’a campaign, and immediately after Warren’s loss, the Fed poked Warren in the eye:
So why were some normal bank critics like Paul Krugman not on Warren’s side? Because another provision, the Volcker Rule, was claimed to do pretty much the same thing, so why bother making a stink that might lead to a shutdown over it?
Aside from the fact that that the two provisions had different effects, and were complementary rather than redundant, the Fed almost immediately on the heels of the Congressional defeat on the swaps push out delayed Volcker Rule implementation by an additional two years. And this was clearly Alvarez’s doing, since the finesse to do what comes uncomfortably close to violating the statue has to have issued from his office. From Dayen:
To accomplish the latest two-year delay, the Fed had to break the spirit of the rules. The Fed is empowered under Dodd-Frank to delay regulations like the Volcker rule for only one year at a time. So in its announcement, the Fed both acted on a one-year delay to 2016, and also “announced its intention to act next year” on “an additional one-year extension.” It did not require banks to apply for the extension based on objective information about particular hard-to-unwind investments.
Get that? The Fed announced now that it plans to punt on implementation next year. Cute.
And this isn’t a mere fight over bank profits and risk-taking, as important as those are. We explained further in the same post how gutting Dodd Frank preserves the Greenspan put and undermines monetary policy. So Scott Alvarez’s actions impinge on Fed decisions that appear unrelated to his official purview.
Yellen’s conduct yesterday, in combination with the Fed’s thumbing its nose at Congressional intent by delaying Volcker Rule implementation by two years, stand together as unassailable proof that the Fed’s protestations that it supports the rule of law and is serious about dealing with the too-big-to-fail problem are hot air. The Fed has repeatedly dealt in bad faith with Congress and the public at large. Despite her barely-contained frustration, Warren was giving Yellen and the Fed one last chance to shape up. I trust Warren will take the Yellen statement on Alvarez at face value, as proof of the Fed’s intent to continue to defy Congress. She will hopefully now recognize the importance of the Audit the Fed movement and throw her support behind it, if not the Rand Paul bill, then a variant more to her liking.