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Volcker-Rule Critic Raskin Seen as a Voice for Consumers

Federal Reserve Governor Sarah Bloom Raskin has criticized the speculative bets banks make with their own capital as an “activity of low or no real economic value.” Photographer: Andrew Harrer/Bloomberg
Federal Reserve Governor Sarah Bloom Raskin has criticized the speculative bets banks make with their own capital as an “activity of low or no real economic value.” Photographer: Andrew Harrer/Bloomberg

Dec. 6 (Bloomberg) -- When Federal Reserve governors voted in 2011 on the Volcker rule ban on banks’ proprietary trading, Sarah Bloom Raskin was alone in opposition. For her, it wasn’t tough enough.

Raskin will be among the regulators voting next week on the final version of the rule, which is likely to be stricter than the original proposal. Later this month, the Senate may decide whether to confirm her as the Treasury Department’s No. 2 official and its highest-ranking woman ever.

Raskin, a Harvard Law School graduate, has criticized the speculative bets banks make with their own capital as an “activity of low or no real economic value.” As Maryland’s top financial regulator from 2007 to 2010, she took on payday lenders and helped write legislation giving homeowners more time to avoid foreclosure. That record suggests that at Treasury she’ll be hard on the financial industry and protective of consumers.

“She’ll have the fortitude to ask the uncomfortable questions,” said Dennis Kelleher, who is president of Washington-based Better Markets Inc., a non-profit group that backs stricter bank regulation, and is a former chief counsel to the chairman of the Senate Democratic Policy Committee. Her initial dissent on the Volcker rule shows “she was ahead of everybody else,” he said.

In a speech yesterday, Treasury Secretary Jacob J. Lew said the rule championed by former Fed Chairman Paul Volcker that’s set to be adopted will prohibit transactions such as JPMorgan Chase & Co.’s so-called London Whale and put more responsibility for compliance on top Wall Street executives.

Whale Trades

JPMorgan’s London Whale trades, so called because of the size of the positions, cost the bank $6.2 billion in 2012 and were described by executives as portfolio hedging.

Raskin, 52, is in line for a job whose responsibilities have varied depending on the priorities of the Treasury secretary. Her resume suggests she will have a role coordinating implementation of the Dodd-Frank Act of 2010.

If Lew “continues this more aggressive push to finalize the Obama legacy financial-reform structure, then the deputy secretary position will be a very substantive one,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics, a Washington regulatory research firm. With her background, Raskin “can play a critical role in taking the Dodd-Frank structure over the finish line.”

Raskin declined to be interviewed during the congressional approval process, a Treasury spokeswoman said.

Speculative Betting

Market-making, or principal trading, is the business of using a firm’s capital to buy and sell securities with customers, while profiting on the spread and movement in prices. Proprietary trading involves banks placing speculative bets with their own capital. The Volcker rule seeks to stop banks with federally insured deposits from making such trades that could threaten their stability.

In a July 2012 speech explaining why she dissented on Volcker, Raskin said proprietary trading had little economic value and “should not be part of any banking model that has an implicit government backstop.”

Her rare dissent put her at odds with Fed Chairman Ben S. Bernanke and Vice Chairman Janet Yellen, the nominee to succeed him. The central bank has held at least 25 votes on regulatory issues since then, and hers was the only stand against the majority.

Raskin said the regulatory “guardrails” needed to be “very close to the road because of the potentially severe dangers of, and costs associated with, proprietary trading by institutions that have access to the federal safety net.”

Societal Benefits

“In fact, it is not inconceivable to think that the potential costs associated with permitting hedging and market-making within these exemptions still outweigh the benefits we as a society supposedly receive from permitting these capital-market activities,” she said.

Banking industry representatives dispute her stance, saying proprietary trading provides liquidity that markets need to function efficiently.

“Market liquidity is a definite good to the society at large, not just to financial system,” said Kevin Nixon, managing director for regulatory affairs at the Washington-based Institute of International Finance, which represents the world’s largest financial companies.

Rob Nichols, president of the Financial Services Forum in Washington, which represents the chief executives of the major Wall Street firms, said “there’s economic value to hedging.”

FSOC Oversight

If confirmed, Raskin would have a voice on the Financial Stability Oversight Council, a group of regulators that decides which non-bank financial companies must be supervised by the Fed because they might pose a threat to the economy if they were to fail. As deputy secretary, Raskin will be a gatekeeper for the Treasury and the FSOC, meeting with industry executives lobbying to avoid Fed oversight.

Though she won’t have a vote on the council, Raskin can attend meetings and express her views. Lew is chairman of the FSOC, which includes the heads of regulators including the Fed, the Securities and Exchange Commission and the Federal Deposit Insurance Corp.

Her views on banking and consumer protection were shaped by her experience as Maryland’s top regulator. In 2010, she successfully pushed for legislation that cracked down on the type of short-term lending that often saddled consumers with interest rates of more than 600 percent a year.

Payday Lenders

Robin McKinney, director of Maryland CASH Campaign, which promotes financial security and education, remembers Raskin sitting behind a U-shaped table in the Annapolis state legislature room, responding to the advocates of the payday industry, and killing their arguments one by one.

“She just didn’t give them an inch” and “really negotiated the pants off of those people,” McKinney said.

Raskin was also instrumental in rewriting the state’s foreclosure process, imposing penalties for mortgage fraud and giving homeowners more time to try to avoid foreclosures.

Changes supported by Raskin allowed hundreds of people to stay in their homes and helped cut the number of state-licensed mortgage companies to 2,000 now from 5,000 in 2008, said Mark Kaufman, who replaced Raskin as the financial regulation commissioner after working as her deputy.

From 1993 to 1998, Raskin worked as counsel on the staff of the Senate Banking Committee. It was there that she worked with then-Senator Paul Sarbanes, a Democrat from Maryland who later was chairman of the committee and co-authored the Sarbanes-Oxley corporate-governance law.

Sarbanes Support

That relationship helped her career. Sarbanes supported her in 2010 when she sought a seat on the Fed’s Board of Governors. At her confirmation hearing before the Senate Finance Committee on Nov. 20, Sarbanes sat next to Raskin as he endorsed her for the Treasury position to his former colleagues.

Her personal life is also entwined in politics. Her husband, Jamie Raskin, is a Democratic state senator in Maryland, where he represents the suburban Washington district that includes Silver Spring and Takoma Park. They have three children.

In between government jobs, she was a managing director at Promontory Financial Group LLC, a Washington-based consultancy founded by former Comptroller of the Currency Eugene Ludwig. The firm employs former financial regulatory officials including Managing Director Mary Schapiro, who stepped down as SEC chairman last year. Promontory has done work this year for Bloomberg LP, parent of Bloomberg News.

Credit Access

Besides focusing on regulation while at the Fed, Raskin expressed concern that lower-income Americans are financially marginalized, with scarce access to bank branches and credit, and haven’t benefited from the economic recovery as much as the wealthy.

In a February 2011 speech, she called the global financial crisis and subsequent U.S. recession the result of a “selfish free-for-all” by several groups including investment bankers. She implored financial companies that were bailed out by the government to take “the high road” and support people hurt by the housing crisis and “go beyond the corrective actions that need to be taken to rectify current deficiencies.”

“When we traveled the low road, the only question was: Will this practice make me rich?” she said.

Elizabeth Duke, who worked with Raskin on community banking when both were Fed governors, described her as “very diligent, very thoughtful.”

Regulatory Landscape

“She thinks about how the regulatory environment would affect banks of all sizes, the financial system and consumers,” Duke said in a phone interview. “She does a lot of outreach, a lot of talking to people before she makes up her mind. People will find her accessible.”

Raskin’s experience supervising community banks in Maryland will give the Treasury a perspective it doesn’t have among its most senior officials, said Sheila Bair, former chairman of the FDIC and now senior adviser at Pew Charitable Trusts.

“Having someone with on-the-ground experience in regulation is essential,” Bair said in an interview. Rules targeted at large banks “often end up biting the smaller banks as well. So having a sensitivity to that sector is important.”

To contact the reporters on this story: Kasia Klimasinska in Washington at; Ian Katz in Washington at

To contact the editor responsible for this story: Chris Wellisz at

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