Felix And Alan: Now That's An Odd Couple

It may be fireworks at the Fed if Rohatyn gets the No.2 post

Nobody ever said that Felix G. Rohatyn was a shrinking violet. Now, the Lazard Freres & Co. investment banker, who was behind such major deals as the 1970s New York City bailout and the 1994 employee buyout of United Airlines, is about to take an even more prominent role: He's going to Washington--if he can win Senate confirmation, that is.

Any day now, President Clinton is expected to nominate the 67-year-old financier as vice-chairman of the Federal Reserve. The President's clear hope: that the outspoken advocate of faster economic growth will serve as a counterweight to the tight-money tilt of Fed Chairman Alan Greenspan, whom Clinton also plans to renominate.

MUNI QUESTIONS. Given Greenspan's high esteem with Republicans and on Wall Street, Clinton feels he has to renominate the Fed chief. But in an election year, the President also wants someone on the board to rein in Greenspan's inflation-fighting tendencies. Outgoing Fed Vice-Chairman Alan S. Blinder occasionally challenged Greenspan, and the Administration hopes Rohatyn will do the same--more often. "If Greenspan thought Blinder was a troublemaker, he'll find Rohatyn will be much less judicious," says one White House insider.

But first, Rohatyn must win confirmation from a GOP-controlled Senate that hardly shares his liberal views. White House insiders and Capitol Hill lawmakers say Rohatyn will face a tough grilling but is likely to survive. He has the solid support of Democrats grateful for his years as a party fund-raiser. Moreover, the Senate has never blocked a Fed nomination solely on policy grounds.

That doesn't mean the GOP will accept Rohatyn quietly. Senate Republicans probably won't raise a whimper when it comes to reapproving the conservative Greenspan, whose current term expires on Mar. 2. But some lawmakers plan to grill Rohatyn about his past as well as his monetary views and his relationship with the Fed chairman. "The first question we'll have is, `How well can he work with Alan Greenspan?' " warns Senator Robert F. Bennett (R-Utah).

Another major source of questions is likely to be recent scandals in Lazard's municipal-bond business--an operation the firm built up largely on Rohatyn's stellar reputation from the New York City bailout. Late last year, Lazard agreed to pay $12 million to settle a muni probe in Massachusetts; in 1994, it and Merrill Lynch & Co. anted up $3.6 million as a result of alleged wrongdoing in munis in Washington, D.C. The firm also faces an ongoing Securities & Exchange Commission probe over its muni dealings in Los Angeles. Rohatyn declined to comment for this story.

Rohatyn also may take fire from Western lawmakers. To comply with a law that prevents any two Fed governors from representing the same district, the White House would have to nominate the Wall Streeter not as a New Yorker--which is Greenspan's home--but as a representative of the region that includes Wyoming, where Rohatyn is building a ranch.

POLICY FEUD. If Rohatyn gets on the Fed board, the fireworks may really begin. Never shy about expressing his views, Rohatyn could trigger a major policy feud. "There's potential for a clash of egos," says one Wall Street economist. "I don't think Rohatyn is going to the Fed to be vice-chairman so much as co-chairman."

At issue is the economy's growth potential. While Fed officials--and Clinton's economic advisers--doubt the economy can grow much more than 2.5% a year without rekindling inflation, Rohatyn thinks it can safely expand at a 3.5% clip. The implication of his argument: The Fed is preventing job creation. That's a sentiment that many executives share. "We clearly need some creative thinking as to how we can have faster growth," says Robert L. Crandall, CEO of Dallas-based AMR Corp. "Felix is a very creative guy."

Within the marble walls of the Fed, however, such ideas probably won't wash. Other members of the policy-setting Federal Open Market Committee strongly back Greenspan's campaign to drive inflation sharply below the sub-3% level of the past four years. If outvoted by his peers, Rohatyn may take his case public. "He will play more of an outside game," predicts a Clinton adviser. "He has a big enough name and ego to use the media to cause Greenspan problems." At least, that's what the Clintonites are hoping.

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