Fed’s ‘Main Street’ Message Protected Its Authority

The Senate bill contains most of what Fed officials sought
Senator John Ensign a Republican from Nevada. Photographer: Daniel Acker/Bloomberg

Senator John Ensign went into a Capitol Hill meeting with four Federal Reserve bank presidents and emerged to say he was convinced of their “concern for Main Street.”

The presidents “argued very vociferously” that a Senate proposal to limit the Fed’s supervisory authority to banks with assets of $50 billion or more would make it “too New York- centric,” the Nevada Republican said after he and other lawmakers attended the May 5 meeting.

A week later, Ensign joined 89 senators in voting to let the central bank keep its authority over 5,000 banks. The vote was another victory for the Fed, which months ago faced one of the biggest challenges to its power and independence in its 96-year history as lawmakers responded to public anger over bailouts of Wall Street firms. The amendment Ensign supported was included in the financial regulatory bill the Senate approved yesterday.

“The Fed’s authorities seemed to be under serious threat,” said David Nason, a former assistant U.S. Treasury secretary who’s now a managing director at Promontory Financial Group LLC, a Washington-based consulting firm. Instead, the Fed “appears to have regained its footing and now appears to be emerging with at least as much authority and likely more.”

The Senate voted 59-39 to approve a sweeping overhaul of Wall Street regulation that would create a consumer protection agency, a mechanism for liquidating large failing financial firms and a council of regulators to monitor companies for threats to the economy. The measure next goes into negotiations designed to reconcile differences with the House bill approved in December.

Audits Avoided

The Senate bill contains most of what Fed officials sought. In addition to preserving their bank-supervisory powers, it maintains a ban on congressional audits of interest-rate decisions that some lawmakers had sought to strip away. Ensign joined most Republicans in opposing the final legislation, saying in a floor speech that it failed to deal with Fannie Mae and Freddie Mac, the housing-finance companies seized by the government in 2008, and “does nothing to address real reform.”

The outcome puts Fed Chairman Ben S. Bernanke in a stronger position to withdraw record monetary stimulus as the economy recovers from the deepest recession since the 1930s, said Senator Claire McCaskill of Missouri, a state that is home to the Federal Reserve banks of Kansas City and St. Louis.

‘Not as Informed’

“They’ve done a good job of educating without lobbying,” said McCaskill, 56, a first-term Democrat who spoke with Kansas City Fed President Thomas Hoenig and St. Louis’s James Bullard during the debate. “A lot of members of Congress were not as informed as they should have been about what the Federal Reserve is and how it works.”

The Fed didn’t get everything it wanted. The bill would make the New York Fed president a political appointee, a move opposed by Hoenig and Bullard, and put the consumer-protection agency inside the central bank without giving it a direct role in running the new bureau. Another change for the Fed: the Senate bill would create a second vice chairman in charge of supervision.

“Now the question is, is the Federal Reserve going to be capable of doing this, and it’s long been my view that’s going to take some reorganization,” within the Fed, former Chairman Paul Volcker, who is now an adviser to President Barack Obama, said to reporters on May 18 in Stanford, California.

Hoenig, a veteran of a 1980s crisis sparked by an Oklahoma bank failure, played a leading role in the Fed victories.

Trips to Washington

The longest-serving regional president, Hoenig, 63, was among the officials who met with Ensign and other lawmakers on May 5. He took two more trips to Washington than planned this year and used extra time on other visits to meet legislators.

He kicked off the presidents’ efforts to keep their authority to supervise banks with a letter to senators in February, persuaded colleagues to speak up and worked with state regulators and community lenders to get the message across: removing the oversight of small banks would harm the Fed’s ability to respond to a financial crisis.

“We spoke our mind on the importance of our role in supervision and for the role of the regional reserve banks,” Hoenig said in an interview. “A lot of senators said, ‘I didn’t understand this, this is helpful.’”

The Fed suffered a setback on Nov. 10, when Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, introduced a financial-overhaul proposal that included stripping the Fed of all bank oversight.

Legislative Affairs

Then the Fed Board’s legislative-affairs chief, Linda Robertson, began to call on the regional Fed bank presidents for help, according to a person familiar with the matter.

Robertson asked regional Fed chiefs to enlist directors and local bankers to contact senators who were reluctant to back Bernanke for a second four-year term. The Fed chief was confirmed Jan. 28 in a 70-30 vote, the most opposition since the chamber started confirming the chairman in 1978.

Bernanke’s supporters, including New York Democrat Charles Schumer, said the 56-year-old former Princeton University economist helped save the nation from another depression. Opponents such as Alabama Republican Richard Shelby faulted him for failing to curb the lending practices that helped trigger the crisis and for his bailouts of Bear Stearns Cos. and American International Group Inc.

Letter to Senators

At the same time, the fight was on to preserve the Fed’s supervision powers. In a January letter to Dodd and other members of the Senate Banking Committee, Bernanke argued that the Fed needs the authority to effectively conduct monetary policy and provide emergency loans to banks. Bernanke made the same argument in testimony to Congress in February and March.

Regional Fed presidents began writing letters and visiting legislators while stepping up their attacks on the Dodd legislation in public comments.

In one-on-one meetings, the presidents stressed their local knowledge, or what Richmond Fed President Jeffrey Lacker calls “retail central banking.”

“I can talk about real estate on the North Carolina and South Carolina coasts, and the economy in Danville, Virginia,” Lacker said in an interview. Such anecdotes provided “vivid examples of what our connection with the district really is.”

The Fed also enlisted banking associations to send hundreds of bankers to Capitol Hill March 17. Their message: The Fed should keep its power to regulate smaller state-chartered banks to avoid developing a bias toward Wall Street firms.

Showing Support

By April, several Republican senators started to show support for the Fed’s stance, including Shelby and Kay Bailey Hutchison of Texas. Hutchison filed an amendment to Dodd’s bill, retaining the Fed’s power to oversee small banks. The amendment was approved in a 90-9 vote.

On a separate front, Fed officials wanted to head off the Senate version of the House-passed measure to audit the Fed, saying removing the shield from monetary-policy reviews would open the door to political meddling in interest rates. Senator Bernard Sanders, a Vermont independent and a self-declared socialist, had one-third of his colleagues as co-sponsors for the measure.

Sanders demanded transparency on $2 trillion of emergency aid from the Fed, while the Obama administration, along with senators such as Dodd and New Hampshire Republican Judd Gregg, opposed removing the shield.

To secure passage, Sanders agreed to rewrite the amendment to provide for only a one-time audit of the Fed’s emergency lending programs.

‘Sold Out’

Representative Ron Paul, the Texas Republican who wrote the original House measure, said Sanders “sold out.”

The compromise, along with lobbying by Bernanke, won over enough Senators to vote against a separate amendment, offered by Louisiana Republican David Vitter and patterned after the House language.

The Fed “gave a little ground,” said Senator Sam Brownback, a Kansas Republican. Senator Bob Corker, a Tennessee Republican, said the Fed “ended up negotiating something that really did create more transparency. And yet it’s the kind of transparency that won’t really undermine their ability to do things in their Open Market Committee.”

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