Yellen Defies Congress, Defends Greenspanian General Counsel Scott Alvarez After Elizabeth Warren Grilling

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 Scott Alvarez is too deeply invested in an out-of-date world view to carry that vision forward.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.

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  1. Clive

    Ha ! I’ve just suffered that most unfortunate of incidents — having my biscuit disintegrate while being “dunked” in my tea — but it was entirely worth it as the proximate cause was my being fixated by the look on Yellen’s fact at 1:01–1:03-ish when realising that Alvarez had been asked for a briefing but hadn’t supplied one. When an underling drops you in it, that’s bad enough, but when — apparently — the underling doesn’t tell you that they’ve dropped you in it, that’s a double whammy. Just occasionally, you get to see The Powers That Be in their true natures as — if only momentarily — the mask slips. Yellen looked in those moments like a Hapsburg duchess confronted by a street urchin.

  2. wbgonne

    Well, we’ll see. My hunch is that Yellen knows that curent-president Obama and president-in-waiting Clinton think Warren is an irritating sideshow, so Yellen is acting accordingly. You want to be the Democrats’ progressive hood ornament? Then expect this treatment. You want power? Run for president.

    1. Yves Smith Post author

      I would not bet against Warren on this one. The Fed is losing more and more cred. The intensity of Fed messaging on Audit the Fed, despite Rand Paul’s bill not being very good, says the prospect of any more transparency or oversight is something they fear and loathe. Getting rid of Alvarez to forestall Warren going full bore after the Fed ought to be an easy trade, particularly since it actually is in Yellen’s interest. She should want her own person in such a critical role. But the Fed will make Warren go a few rounds for reasons of institutional ego (and of course to consume her energy and time). The Fed is extremely unpopular in the heartlands and they know it. Warren has actually been given Yellen the benefit of the doubt, despite Warren’s unusually obvious irritation in the meeting (in fact, her irritation may be due to her need to exercise restraint heretofore and be sure where the facts lie before she makes any other moves).

      1. wbgonne

        You may be right. But all I see (and foresee) are pyrrhic victories for Warren, as with Weiss. It’s really a shame because Warren is sharp as a knife and could accomplish a lot if she could seize control on the Democratic Party. Unfortunately, a senator — however well-intentioned — is no match for the president, and as long as the Democratic Party remains in the firm grasp of neoliberalism, Warren will be marginalized and trivialized. Maybe that realization will motivate Warren to challenge Clinton but it doesn’t seem likely to me anymore.

        1. Yves Smith Post author

          Huh? You could not be more wrong on Weiss. To deny Obama what was supposed to be an uncontroversial, slam-dunk appointment, with the Washington Post, the New York Times, and the Wall Street Journal all messaging persistently against her, at Administration behest, was a major coup. It was a David v. Goliath battle that she won decisively. She rose enormously in stature both in terms of her credibility on the Hill and in terms of how much the banks fear and loathe her. Warren was known as a formidable bureaucratic infighter at Harvard. She may be proceeding more deliberately than you like and have different aims than you like.

          Reform of parties in the US in modern times has never been accomplished inside the apparatus. The American labor movement lost all its power when it affiliated with the Democrats. The gay rights movement similarly pressured parties from the outside. Warren is trying a novel strategy of being a feral insider, and with an independent funding base, she can get away with it. The party needs her more as a funding magnet than she needs it.

          Now she runs the very large risk of being co-opted (and I think she has been to some degree) and playing too careful a game, but the flip side is she has chosen targets like Weiss and Alvarez very astutely. Her Cromnibus fight, even though it was a loss, also completely freaked out the banks. So she’s accumulating power and continuing to experiment with how to use it.

          1. wbgonne

            Yves, I agree with much of what you say. However, your own comment hits the problem squarely:

            Reform of parties in the US in modern times has never been accomplished.

            Now, Warren’s “feral insider” approach might succeed in academia but I do not believe it is viable in American politics EXCEPT by running an insurgent campaign for president. In the senate, Warren can chalk up some isolated wins and annoy the people in charge but, in the end, the grip of neoliberalism gets tighter and tighter. IMO, the inability to effectuate fundamental change from within the party is even more true than it has been historically and, as you say, it never worked before either. Once the presidential horse-race gets underway, Warren’s notoriety will be eclipsed by the attention heaped on Clinton. And once the election concludes, assuming Hillary wins, Warren will be noticed only to the extent she illustrates discord within the Democratic Party. How much of that will the Clintonistas tolerate?

            Yes, Warren has some money but her money is dwarfed by the neoliberal money aligned against her. I think the Democrats need Warren not so much for her money but for her credibility and the brand-differentiation that gets people to the polls to vote for Democrats, most of whom — especially at the very top — disdain Warren’s views and have no intention of implementing the policies Warren favors. IOW, the Democratic establishment is using Warren.

            If Warren remains in the Democratic Party and declines to challenge Clinton, neoliberalism tightens its hold on the Democratic Party and, therefore, the country and the world. Frankly, I do not believe we have the luxury of time: the problems — global warming, wealth disparity, political collapse — are approaching critical status and the neoliberals are doubling down on greed and thievery. Nipping at the margins is wholly inadequate under the circumstances.

            IMHO, naturally.

            1. James Levy

              Not saying she shouldn’t try, but Warren is not going to win the Presidency in 2016, period. The Republican noise machine would chew her up and drown her out. The polls on whether on not Obama “loves America” shows a really screwed-up society that desperately wants to have a “real American” aka white Protestant male back in the Oval Office. They may countenance Hillary because she is a brand they are so used to and is so pugnacious on foreign policy (no milquetoast she). But a Harvard type from “Taxachusetts”, forget it.

              My other point is that I have no idea if Warren left the Democratic Party she could keep her seat. You have enough party loyalists in this state to run a spoiler campaign that could easily unseat her. Think of what was done to Lamont in Connecticut. Staying a Democrat may be her only opportunity to do anything and hold any power. Reality eventually has to step in.

              1. wbgonne

                Not saying she shouldn’t try, but Warren is not going to win the Presidency in 2016, period. The Republican noise machine would chew her up and drown her out.

                I think you are very much mistaken and one of the reasons is that, unlike the other mewling Democrats, Warren does not cower in fear before the noise machine. Warren is tough as nails and brilliant. Her media appearances are almost universally successful, unlike Clinton, who is as hamhanded a politician as one can imagine. Another reason is that Warren is a plain-spoken populist from Oklahoma, a serviceman’s daughter of humble beginnings who earned her way into one of the world’s most prestigious universities in the world, and then into the U.S. Senate (feel free to use that, Elizabeth!) A third reason that Warren could win is that she, unlike Clinton, will thrill the Democratic base, which will be absolutely necessary and which Clinton decidely will not do. And, oh yeah, like Hillary, Warren is a woman.

              2. bruno marr

                Didn’t Lamont run as the Democrat? While the person he defeated in the primary Joe Leiberman (sp?) ran as the “Independent” candidate. And the same state that gave us the “Senate Compromise” returned the primary defeated Joe back to the US Senate. (An informed electorate. . .)

                1. James Levy

                  My point being, in that case the Democratic Party money men threw their money behind Leiberman and the Republicans put up a patsy and starved him of funds. In other words, the legacy parties colluded to make sure that a “safe pair of [neocon, neolib] hands” got the seat, and they’d do the same thing if Warren ran as an independent in Massachusetts.

            2. Yves Smith Post author

              I think the odds are actually quite high (~40%) that Clinton drops out for health reasons. She looks terrible and it is widely rumored that the time she passed out while at State was due to a mini-stroke. I don’t think she can take the stress and hours of a campaign.

              1. wbgonne

                I don’t wish Clinton ill health but I sure as hell hope she doesn’t run, or that she drops out if she does run.

                1. walt

                  Clinton passing her baton to Warren for this election would be the most statesman-like thing she has every done.

    1. Chauncey Gardiner

      Lovely “Public-Private Partnership” that is fueling these markets every higher with public money. Another reason to audit the Fed’s monetary policies and communications with the Primary Dealers. I would also throw the Treasury into a threesome audit. Don’t ever recall anyone voting on sending the stock markets ever higher as a matter of public policy.

    2. ambrit

      Hmmm… The Story of the Stock Market (TM) as told with gummis. [Now wait a minute you say, aren’t the Gimmi Yummis mostly bears? Something ain’t quite jake here. {Suspects a conspiracy.}]

  3. Jim McKay

    WSJ main FP article today (Wed, 2/25) describes Yellen’s testimony as generally upbeat: employment up, possible interest rate rise… all the usual stuff.

    I’m reminded of BUSH, just before 1st ARM reset sent mortgage bonds south and all that followed, saying (from memory, on national TV): “I just read a report that passed my desk, and the economy is strong.”

    Reading here (and elsewhere) of the auto loan derivatives (and who knows how many other WS ponzi schemes borne in recent years), seeing this video and Yellen’s unwillingness to acknowledge the obvious… or to ignore the obvious in lieu of a deceptive bigger picture WSJ describes this morning…

    These people just don’t learn. Seems like deja vu all over again. The weak perceived “recovery” is going to get it’s legs pulled out in a huge way not too far down the road.

    These people have blinders on, yet are relied upon to make good decisions based on their (blinded) vision. And they deny having blinders.

  4. Phil Snead

    Yikes, you’re right, Yves. Yellen certainly sounds like a FOMC business-as-usual captive. And I nominate her for Harry Shearer’s “gratuitous ‘So'” utterer of the week. Painful to watch.

  5. John Day

    I continue to predict a 2016 POTUS race between Warren and Rand Paul.
    I foresee them as garnering support of left and right spectrum of discontent in the global financial rollover already in progress. They are both working well within the system, and have given very clear signals of willingness to comply within the real power structure, including those who finance campaigns, and direct much support. The system will need another FDR, an insider’s outsider, to manage an orderly reset.

    1. NotTimothyGeithner

      I don’t know about Rand. He has never struck me as comfortable in a new Hampshire/Iowa or anywhere for that matter, but he is a self-professed libertarian and Ayn Rand devotee which means he is a tad off. If Hillary doesn’t run, I don’t think the “I am woman hear me roar” vote will materialize, and Warren will face questions about foreign policy and Obama she won’t be able to get away with not answering.

      I’m going to throw out the name Martin O’Malley for the Democrats. His criticisms of the national Team Blue strategy in 2012 is reminiscent of Dean’s 50 state strategy, and his own campaigns focused on economic issues as opposed to social issues as a linchpin.

        1. Ex-PFC Chuck

          I’m for the W ticket. Warren/Webb or Webb/Warren. Either way is much moe electable than Sanders/Warren.

          1. lyman alpha blob

            Interesting that two of the most well-liked Democrats putting out feelers and/or being encouraged to run are actually former Republicans, albeit of the ‘the party left me’ type. One more example that there really isn’t that much difference between the two parties other than the social issues they use to fire up the base but often don’t really believe in themselves.

            Be careful what you wish for because you just might get it….

            1. hunkerdown

              Regardless of how much they might fuss about showy religious displays in public, neoliberals do love a conversion narrative.

        2. Blurtman

          That is the only Dem ticket I would vote for, but they’d have to pivot to the right with a hawk defense secretary to have a chance.

        3. Kyle

          Does anyone here really believe that Warren’s talent is of any benefit to us as a Vice President???! C’mon! We need her in the Senate as long as possible. Sanders is taking a look at the presidency. Warren needs more help in the Senate and Sanders as a presidential contender. Thoughts anyone?

  6. Dan Lynch

    Superb analysis, Yves. Thanks much for this article.

    I do have one quibble:

    the professedly-apolitical Fed

    That’s a modern misconception. By contrast, FDR’s Fed Chair Marriner Eccles was outspoken on political policy. A public dust-up with Truman in 1948 led to Truman demoting Eccles. Subsequent Fed chairs have taken the hint and kept a low political profile.

  7. James Tennier

    With captain Yellen at the helm the situation is hopeless but not serious, to her anyway; (Capt. Quigg.)

  8. susan the other

    Sherrod Brown, another of Warren’s friends in the senate (on the student loan mess), was particularly nice to Yellen yesterday. I thought he went out of his way to encourage her to remain focused on employment and wages and etc. The senate isn’t nearly as nasty to Yellen as they were to Bernanke. Last year Yellen brought props. She proffered a 2-inch thick volume of tasks the banks must complete to fill their “living will” requirement. Which is necessary because they are all the living dead. And she made excuses that sounded like it was going to take the rest of the century to set up new protocols. So Alvarez is just more of the same delay, delay, delay. Until central bankers can figure out how to run the world without an economy. Putting derivative contracts in the depositories of the TBTFs seems like the most outrageous potential act of socialization of losses, especially when (sitting together for an interview) both LeGarde and Yellen smiled at the question: What are you going to do about derivatives? They both admitted they didn’t fully understand derivatives and they “were watching them closely.” When I think about this whole mess sometimes I get the giggles because it is so obviously funny. What central bank was ever – ever – apolitical? Now the goofballs have managed to destroy the system (which was already imploding) but they don’t have a system to replace it. But they do have new institutions like “Stability Committees” which are seeing to it that everything remains “stable.” I mean, you gotta laugh. And wish them well because if they screw up again they probably won’t be able to fake it to the finish line.

  9. anonymous123

    At Berkeley the professors always speak of Yellen as a hero of sorts. Maybe one day I’ll get up the nerve to ask a pointed question in class about her recent support of Alvarez.

  10. reslez

    Yellen and Alvarez displaying shocking levels of depravity and imperial arrogance toward the Senate… so, basically, business as usual at the Fed. Audit them, twist their arms, make them cry. We’re your funding base, Warren, keep throwing us red meat. Know what I call Weiss? A good start. I want blood and by that I mean a lot of destroyed careers. Alvarez would make a great Wal-mart greeter.

    Thanks Yves for the analysis and keeping us up to date. Let them eat the same dog food they try to force on us.

  11. dcb

    Yeah, warrens questioning was completely ignored by the nytimes, and I sent them 2 days ago the findings of an AFL-CIO economist

    Then you write what you do two days after send a letter in which I link to a afl-cio PhD economist
    who concluded:
    “”The Fed suffers from a proclivity to anti-working family bias. That bias reflects both the
    specific hard-wired institutional characteristics of the Fed and the political characteristics of
    the time. With regard to institutional characteristics, the Fed’s legal set-
    up means it is significantly influenced by the banking industry, and it is also prone to regulatory capture by the banks which it is supposed to regulate. With regard to the politics of the time, the neoliberal capture of the economics profession and society’s understanding of the economy imparts an intellectual bias to the views of policymakers and the advice of the Federal Reserve’s economic staff (page 27)

    or this

    Dr. Thomas Palley is an economist living in Washington DC. He holds a B.A. degree from Oxford University, and a M.A. degree in International Relations and Ph.D. in Economics, both from Yale University.

    God, I hate the NYtimes, and I’m a liberal dem.

  12. steelhead23

    I am financially as dumb as a stump and have a habit of grasping at disjointed tid-bits in an effort to make a whole. I am not a conspiracy theorists so much as a wild conjecturer. Might there be a connection between the Fed’s fear of an audit and the authorized delay in forcing banks to divest excessive derivatives positions? Here’s my crazy logic. The Fed currently holds a great deal of MBS from its various QE programs – and perhaps even the bailout of AIG. That is, the Fed holds securities it purchased at par that are notoriously illiquid. From the Fed’s perspective and that of its apologists, each and every one of those securities are ‘money good.’ And how would we ever know differently? Well, if the big banks were to sell those very same issues on the open market at less than par, then it would be clear the Fed has been lying. Am I barking up the wrong tree – or might these two Fed issues have a common thread?

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