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David Mullins' Brisk Stride At The Fed



Before David W. Mullins Jr. testified to Congress on the Salomon Brothers scandal, he made a bet with Federal Reserve Board Chairman Alan Greenspan. Mullins, the Fed vice-chairman, predicted that he would not be asked a single question. He lost the bet, but it was a close call. Congressional interrogators, intent on blaming the Treasury Dept. and other regulators for the Salomon affair, virtually ignored the dry, professorial Mullins.

That was their mistake. Just three years after coming to Washington from teaching at Harvard business school, Mullins has emerged as a key behind-the-scenes figure in U. S. financial regulation. Bankers with bad news to report find themselves in Mullins' office, just down the hall from Greenspan's. His views on modernizing American finance are shaping the Fed's position on bank reform. And recommendations for an overhaul of the scandal-shocked Treasury markets, due from regulators this month, are sure to bear Mullins' mark. HAWK OR DOVE? The Fed's vice-chairman, a job the 45-year-old Mullins has held since July, traditionally takes charge of regulation. But Mullins brings more to the job. He has a deep knowledge of corporate finance and a wide-ranging network of contacts throughout government, banking, and Wall Street. "David really does understand financial markets," says an official of one regional Federal Reserve Bank, "and that has not been an area of strength for the Fed board."

Mullins doesn't get the same high marks for his views on monetary policy. Observers at the Fed's closed-door meetings say that his colleagues still are not sure whether he is a hawk or a dove on inflation. Still, his financial expertise is making him more influential, as other Fed officials realize that the ills of the banking system are helping prolong the nation's economic malaise. His analyses of credit flows helped Greenspan persuade reluctant Fed governors to resume cutting interest rates as last summer's recovery faded. Like Greenspan, Mullins believes the economy is still growing but is being hobbled by corporate efforts to cut debt loads and by bankers who are reluctant to lend to any but the best borrowers.

Garnering power in Washington was never one of Mullins' ambitions. The son of a former president of the University of Arkansas, he took naturally to academia. After graduating from Yale and earning a PhD in finance at Massachusetts Institute of Technology, Mullins joined the Harvard faculty in 1974.

Although his teaching earned him top ratings from students, he built his reputation on research. Mullins and MIT's Paul Asquith caused a stir when they demonstrated in 1989 that junk-bond investors faced a one-in-three chance of being wiped out if they held their paper for 10 years. Junk-bond backers, who boasted of short-run default rates of less than 3%, attacked the study -- but were silenced six months la-ter when the junk market collapsed.

As a finance whiz with a practical bent, Mullins earned up to $500,000 a year as a consultant on Wall Street. He testified for both acquirers and targets in takeover cases, depending on which side was promoting free and open capital markets, he says. He supported Carter Hawley Hale's defense against The Limited, but testified against Household International's poison pill. His work on Euromarkets convinced him that "traditional banking as we know it is being left behind," Mullins says. "Corporations have lots of ways to bypass institutions that tack three percentage points of noninterest expense onto the cost of money."

BAILOUT BARD. Those consulting contacts set Mullins on the path to the Fed. When Nicholas M. Brady, then chairman of Dillon, Read & Co., was tapped to probe the October, 1987, stock market crash, Brady's associates suggested that Harvard's Robert R. Glauber and Mullins run the study.

Brady, named Treasury Secretary in 1988, soon called to ask Mullins what he knew about savings and loans. "I never should have answered that question," Mullins says. As Assistant Secretary for domestic finance, he worked with Under Secretary Glauber to draft the S&L bailout package and shepherd it through Congress in 1989. Fed Governor H. Robert Heller resigned just as the S&L bill was wrapped up, and Mullins made a bid for the job -- surprising Glauber, who thought his old friend would go back to Harvard.

Mullins was drawn both by the Fed's power and its quasi-academic style. The Fed's staff of PhD economists welcomed him: "I told him, 'We always wanted to hire a corporate finance expert, but I never knew they'd work so cheap,' " says Deputy Research Director Edward C. Ettin. (Mullins will earn $115,300 this year.) And Mullins fits right in at the central bank. "The Fed is a big debating society, and David is a great debater," says Glauber.

At meetings, Mullins takes the floor with a yellow legal pad covered with scribbled notes -- color-coded, in some cases, into main themes, secondary points, and bits of evidence. He leavens his fast-paced presentations with dry humor. How could Salomon expect to get away with bidding violations, he asks, in a market full of dealers "who'd turn in their grandmother for a quarter of a point?" Listeners who can't keep up may be left feeling like the class dullard: "David doesn't suffer fools," says a former Treasury colleague.

GETTING HIS WAY. Mullins' goal for the U. S. banking and financial system is to drag it into the 21st century. He was appalled last summer by Salomon's admission that it broke Treasury rules, but he could barely contain his glee that the scandal created an opportunity to overhaul Treasury's antiquated auction system. If Mullins has his way, the regulators later this month will propose computerizing Treasury offerings to break the market power of big dealers, coupled with streamlined monitoring to prevent future squeezes like that garnered by Salomon last May.

And Mullins is getting his way more often -- even on monetary policy. When the Fed's policymaking Open Market Committee met on Nov. 5, Professor Mullins set aside his scrawled notes on yield spreads in the bond market, the tone of the stock market, and foreign-exchange sentiment to zero in on the crucial issue: fears of consumers, manufacturers, and retailers. "That's not his area of expertise, but he hit it hard and he did a good job," says a Fed staffer. Many Fed policymakers were skeptical going in, but Mullins prevailed. The next day, the Fed cut interest rates. That's the sort of clout that really counts.



THE ECONOMIC OUTLOOK The economy is recovering, but too slowly. Unlike the

inflation hawks on the Fed, he has argued in favor of an easier monetary

policy. He fears an extended period of slow growth now will make it harder for

the Fed to fight inflation in the future

BANK REFORM Banks should be deregulated and allowed to compete with brokerage,

insurance, and finance companies on an equal footing. Industrial companies

should be allowed to own banks

STOCK MARKETS The power to oversee trading in stocks, stock options, and

stock-index futures should be centralized in a single agency -- the Securities

& Exchange Commission

GOVERNMENT SECURITIES MARKETS Mullins is pushing to automate Treasury auctions

and experiment with new auction techniques. He believes heavy regulation of

this market is unnecessary

DATA: BWMike McNamee in Washington

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