Tim Pawlenty's About-Face on Wall Street
Tim Pawlenty has got to regret what he calls “the now-infamous ‘snout out of the trough’ line.” Not that he’ll admit it. The former governor of Minnesota and failed Republican presidential candidate is sitting in a Washington corner office still decorated with the grip-and-grin photographs of his predecessor. His black travel roller bag rests nearby. He’s a man in transition, discussing his move through the revolving door from public service to corporate influence.
Seeking his party’s nomination last year, Pawlenty tried to shed a competent-but-bland conservative profile. He engaged in Tea Party-lite attacks on Federal Reserve Chairman Ben Bernanke. He opposed raising the national debt ceiling, even if that meant a government default and possible economic calamity. And he went on CNN, CNBC, and Fox to deliver “a truth message” to Wall Street: “Get your snout out of the trough.”
Today that’s a tad awkward. As chief executive officer of the Financial Services Roundtable (FSR), he now works on behalf of JPMorgan Chase, Citigroup, Bank of America, Wells Fargo, and the 96 other members of the Roundtable, which has 50 employees and spent $7.7 million on lobbying in 2011, according to the nonpartisan Center for Responsive Politics. A look of annoyance briefly clouds Pawlenty’s placid face when this is noted. No, he says, he sees no inconsistency. Taxpayer-funded bailouts—the trough he railed against—are history: “We have a mechanism in place for the orderly wind-down of systematically important institutions.” Wall Street itself, he adds, will have to pay for any future bailouts.
One could quibble that the Dodd-Frank financial-reform law, which created the wind-down authority Pawlenty praises, was enacted (over Republican resistance) in 2010—a full year before his anti-Wall Street tirade. Setting aside the chronology, suffice it to say that, as a candidate seeking populist credibility, Pawlenty beat up on big bankers. Today he works for them.
“The Governor,” as his subordinates call him, wants to look forward. A central element of his new job is shifting attention away from the 2008 mess, which Wall Street helped cause, and toward the imperfections of the legislative response. He compares the crisis to an “avalanche,” an act of nature. “As that gets increasingly in the rearview mirror,” he told reporters on Sept. 20, when the FSR announced his appointment, “there is progress that’s been made in terms of restoring the regulation and credibility of the financial-services industry in this country, but more work needs to be done.”
The main piece of work ahead concerns implementing Dodd-Frank, a complicated statute with two core purposes. First, it empowers the government to put a failing megabank into supervised receivership. The idea is to avoid a repeat of the chaotic September 2008 collapse of Lehman Brothers, which set off global panic. That’s the part Pawlenty (belatedly) embraces.
Dodd-Frank also increases day-to-day regulation in hopes of preventing traumatic bank collapses in the first place. That part, Pawlenty says, requires “refinement.” Now, 27 months after its enactment, most of the law has yet to take effect—in large part because the financial industry has been so busy working to “refine” it by means of relentless lobbying and filing lawsuits in federal court.
Keeping attention focused on purportedly excessive regulation “is the whole game for the banks,” says Jeff Connaughton, a former corporate lobbyist and Democratic congressional aide. He recently published a book entitled The Payoff: Why Wall Street Always Wins, which argues that, far from imposing unfair burdens on the banks, Dodd-Frank did not go nearly far enough to protect against financial meltdown. “Forget that greedy bankers took us to the brink of a second Great Depression. ‘What we need to worry about is overregulation’—that’s the industry message,” Connaughton says. “Why anyone would believe them is beyond me.”
That’s where Pawlenty comes in. Despite his anti-Wall Street flourishes as a candidate, he’s poised to become a leading purveyor of that message. Based on what the FSR and its allies have accomplished since Dodd-Frank was approved, there’s every reason to think he’ll succeed.
Pawlenty, 51, never made a very convincing pitchfork scourge. Sure, he took the podium at a Tea Party Patriots rally in Phoenix in February 2011 to condemn “the royal triangle of greed: big government, big unions, and big bailed-out businesses.” And yes, the following month he reassured Iowa’s Faith & Freedom Coalition that “the Constitution was designed to protect people of faith from government, not to protect government from people of faith.” Behind the rhetoric, though, he was someone East Coast bankers and other money people trusted. Of the $5.2 million he raised for his short-lived presidential run, more than $2 million, or 39 percent, came from donors in securities, banking, investment, and insurance, according to the Center for Responsive Politics.
In March, the FSR announced that its chief for the past dozen years, a Republican former congressman from Texas named Steven Bartlett, would be retiring at the age of 65. “It’s time for a new captain,” Bartlett said. The job pays well—$1.8 million in 2010, the most recent year for which tax records are available. The FSR considered dozens of candidates, including former Senator Blanche Lincoln (D–Ark.), now a lobbyist with a corporate law firm, and former Representative Ken Bentsen Jr. (D–Tex.), who works for another trade group in Washington. Although he lacks experience in financial services, Pawlenty represented the biggest name on the list.
As Minnesota governor from 2003 to 2011, Pawlenty won Republican praise for cutting spending and holding the line on taxes. Before that, he served in the state legislature for a decade, four of those years as House Majority Leader. He was a finalist in the 2008 John McCain vice-presidential sweepstakes, losing out to Sarah Palin. This year, after Pawlenty elicited little enthusiasm in the runup to the GOP primaries, Mitt Romney considered him as a running mate. Once again, the Minnesotan was passed over.
Pawlenty might have had a shot at a second-tier Cabinet post in a Romney administration, or he could have gone home to run for the U.S. Senate. He decided instead to sample the private sector. His most recent salary as governor was $121,000. He and his wife, Mary, have a daughter in college, another in high school, and no family fortune. The Roundtable won’t reveal his starting pay, but there’s no reason to think it’s less than the nearly $2 million Bartlett collected. After 18 years in elective office and no indication that he has national political appeal, Pawlenty says of public life: “I’ve had my full run.”
FSR is part of a collaborative, overlapping network of financial trade groups that includes the American Bankers Association and more specialized outfits, such as the Mortgage Bankers Association, Securities Industry and Financial Markets Association, and International Swaps and Derivatives Association. Broader-based organizations such as the U.S. Chamber of Commerce and Business Roundtable sometimes join the fray. And major banks such as JPMorgan and Goldman Sachs each have their own dedicated Washington shops. The legions of financial influence are large: Last year, finance, insurance, and real estate interests spent $479 million on lobbying.
In the wake of the 2008 crisis, the FSR gained a quirky pop-cultural prominence as a result of the starring role its lead hands-on operative, Scott Talbott, played in Inside Job, which won the Academy Award for documentaries in 2011. Serving as the industry’s Washington face, Talbott gave a memorably insouciant performance. When filmmaker Charles Ferguson asked him, “Are you comfortable with the level of compensation in the financial-services industry?” Talbott answered, “If they’ve earned it, then, yes, I am.”
“Do you think they’ve earned it?”
“I think they’ve earned it.”
Talbott lists his Inside Job credit on his FSR website bio page, along with “top lobbyist” awards for 2009 and 2011 from The Hill newspaper. Unfailingly friendly, he also serves as the group’s media gatekeeper. He agrees to make Pawlenty available for an interview on the condition that the new CEO will not answer detailed policy questions because he hasn’t had enough time to study his new portfolio.
Washington veterans predict that once he’s up to speed, Pawlenty will make an effective frontman (especially if Romney defeats President Barack Obama on Nov. 6 and Republicans retain control of the House). By all accounts, he’s smart and industrious. “He may not be an expert, but I have no doubt he sincerely agrees with the industry’s antiregulatory philosophy,” says former Democratic Senator Ted Kaufman of Delaware. “The guys in this industry don’t give an inch. There’s no sense of shame, and they have the money to just keep fighting and fighting until the other side goes away.”
Kaufman speaks from experience. The longtime chief of staff to Joe Biden, he was appointed to serve the two remaining years of his boss’s Senate term after Biden became vice president in January 2009. Kaufman helped lead a quixotic campaign in 2010 for legislation overhauling Wall Street that would have put strict caps on the size of big banks and the risky loans they could make. “We failed,” he concludes. “The other side was too strong and could buy too much support in Congress.” In the runup to the 2012 elections, donors from finance, insurance, and real estate gave $465 million to candidates, more than any other industry grouping tracked by the Center for Responsive Politics. The contributions went 2-1 to Republicans over Democrats.
“As a result of the failure to make Dodd-Frank tough enough, we still have the too-big-to-fail problem,” Kaufman argues. The largest financial giants are larger than ever. The top 50 U.S. bank holding companies control assets of $15 trillion, a 500 percent increase since 1991, according to the Federal Reserve Bank of New York. The share of those assets controlled by the 10 largest firms has more than doubled over the past two decades, from less than 30 percent to more than 60 percent. If No. 1 JPMorgan or No. 2 BofA were to falter during a future period of market anxiety, the government would be forced to prop it up rather than risk financial Armageddon, Kaufman predicts.
Pawlenty disagrees. He argues that Dodd-Frank, as passed, did enough to address the too-big-to-fail problem. The law required large banks to draft “living wills,” or contingency plans anticipating how they would be liquidated in a crisis. And it created a financial stability council charged with monitoring excessive risk-taking. Wall Street, according to Pawlenty, has been sufficiently weaned from the bailout trough. We’ll only ever know whether the Dodd-Frank provisions will work for an orderly breakup of some future Lehman if another institution that large and that interconnected to the rest of the financial system threatens to go over the cliff. The more immediate question is whether industry “refinements” of the law will lessen or increase the likelihood that another leviathan ends up teetering on the edge.
What Pawlenty, Talbott, and their colleagues call refinement, skeptics see as a strategic neutering of financial reform. “The bottom line,” says Dennis Kelleher, head of a pro-regulatory advocacy group called Better Markets, “is that Wall Street, their lobbyists, and their Republican friends are fighting Dodd-Frank tooth and nail.”
The many unresolved elements of the 848-page law include the Volcker Rule, designed to restrict “proprietary” securities trading that major banks do for their own accounts, and a thicket of rules intended to restrain and make more transparent the hundreds of billions of dollars of esoteric, poorly understood derivative transactions that contributed to the 2008 debacle. Overall, as of Oct. 1, agency regulators had missed 63 percent of 237 deadlines Dodd-Frank set for writing final rules, according to the law firm Davis Polk & Wardwell. An additional 161 deadlines haven’t even come up on the calendar yet.
“It’s a mess,” says Kelleher, a blunt former corporate lawyer and Democratic congressional staff member whose organization is funded by an Atlanta-based hedge fund manager named Michael Masters. The Volcker Rule has been significantly watered down and is nowhere near taking effect, Kelleher says. “The biggest reason the Federal Reserve, the Securities and Exchange Commission, and the other agencies haven’t completed their work is industry lobbying.”
Not so, says Pawlenty: “These are large, complex issues that it’s going to take some time to work through.” By “work through,” he means he’d prefer to see the Volcker Rule replaced with “a less burdensome legislative alternative,” as the FSR and Securities Industry and Financial Markets Association put it in a joint Sept. 7 letter to Representative Spencer Bachus (R–Ala.), chairman of the House Financial Services Committee.
The FSR estimates that the Volcker Rule alone “will increase borrowing costs by up to $43 billion a year,” while Dodd-Frank as a whole will inflict a 2.7 percent hit on gross domestic product. “The cumulative weight of the Dodd-Frank act will negatively impact the economy and consumers,” the group says on its website. One alternative the FSR prefers would be to rely on more stringent global capital requirements known as Basel III; the problem with that idea is that the Basel III initiative is also bogged down by industry lobbying and international bickering.
Once a statute like Dodd-Frank is on the books, lobbying modes shift. Instead of schmooze sessions on Capitol Hill lubricated by campaign fundraisers, influence peddling takes the form of densely written commentary from the affected business interests and grueling in-person visits to rule-writing agencies. Ninety-three percent of the thousands of lobbying meetings at agency offices involve industry representatives such as the FSR, according to Kimberly Krawiec, a law professor at Duke University who has analyzed a sampling of regulatory guest logs. Only 7 percent involve public interest groups, labor unions, lawmakers, and others.
On Oct. 2, the FSR wrote the Commodity Futures Trading Commission with an “urgent request” that it “delay the effectiveness of all rules” to be issued under Title VII of Dodd-Frank, which is supposed to move the previously unregulated derivatives market into a world of public exchanges and government supervision. “We recognize that asking the Commission to abate this process is much like asking weary travelers, after a long and arduous journey, to pause just as their destination comes into view,” the FSR continued. “But imagine those travelers at the top of the hill, on a train that is approaching a station where the tracks are not yet finished and the risk of derailment is high.”
In less elegiac prose, the comment went on to request additional guidance on such highly technical matters as which businesses would have to register as swap dealers, how new rules would apply to non-U.S. affiliates, and “whether foreign exchange forwards and foreign exchange swaps will be exempt from the definition of swaps.”
The CFTC went ahead on Oct. 12 and put in place requirements that companies begin tallying derivative trades to determine whether they will be subject to Dodd-Frank’s most stringent standards for capital, collateral, and trading. “The days of opaque swaps markets are ending,” CFTC Chairman Gary Gensler said in an Oct. 10 speech at George Washington University.
Republicans in Congress have vowed that they’ll fight the CFTC rules. “It’s my view that CFTC Chairman Gary Gensler is using his newfound power [under Dodd-Frank] to unilaterally impose his will on financial markets,” Senator Pat Roberts of Kansas, a senior member of his party on the Senate Agriculture Committee, which oversees the agency, said in a written statement. Roberts called for hearings to examine the CFTC’s latest moves. Gensler has maintained that he’s using his authority judiciously.
On Constitution Avenue, between Capitol Hill and most of the regulatory agencies, sits the local U.S. courthouse for Washington, where businesses have another avenue for “refining” regulation: the lawsuit. “We have a system that has checks and balances in it for a reason,” says Pawlenty. “You can’t have a certain set of decision-makers who go beyond what the law allows.”
So far, at least a half-dozen such suits have challenged the way the SEC, CFTC, and other agencies are putting Dodd-Frank into effect. In one case, a Texas bank backed by the conservative Competitive Enterprise Institute is challenging the constitutionality of the new Consumer Financial Protection Bureau. That case and most of the others are pending, but early results have not favored the government. Several judges have endorsed industry contentions that agencies did not give sufficient attention to whether the costs of regulation outweigh the demonstrable benefits. In the most recent of these decisions, U.S. District Judge Robert Wilkins, an Obama appointee, ruled on Sept. 28 that when, under Dodd-Frank, the CFTC adopted position limits on speculation in energy, grain, and metals markets, the agency had failed to show that the restrictions were “necessary and appropriate.”
The CFTC defeat, which the agency is likely to appeal, followed a July 2011 ruling by the appellate court in the same building which, at the behest of the Business Roundtable, struck down an SEC rule that would have allowed major shareholders to challenge corporate leaders by placing dissident board candidates on a company ballot. In an implicit invitation for more industry challenges, the appellate court made broad statements about the need for regulators to analyze the economic costs of their rules. The SEC did not appeal.
Kelleher says the prospect of Dodd-Frank getting tied up in litigation—with challenges to the Volcker Rule and other provisions expected—worries him more than any other obstacle to the law. “The problem with the cost-benefit analysis the industry is pushing and the courts seem to be embracing,” he says, “is that Wall Street can always exaggerate the costs, while the benefit of preventing another Great Depression is almost impossible to measure.” Putting this point differently, former Senator Kaufman contends that Dodd-Frank oversight raises regulatory costs for large banks for a reason. “We could have done this in a more straightforward way by capping their size or breaking them up, but there wasn’t the political will,” he says. If the big banks want to avoid the Dodd-Frank regulatory tax, he says, they can shed assets, become smaller, and pose less of a threat to the financial system at large.
In Pawlenty’s view, the glacial rate at which Dodd-Frank’s rules have been implemented is evidence that the process is working properly. Dodd-Frank, he says, “happened fairly suddenly, and it has enormous consequences and it covers a wide variety of issues. So it’s reasonable that it’s going to take a little time for the dust to settle.” Pawlenty prescribes patience. “I look at this not only as what’s going to happen over the next six months,” he says, “but what’s going to happen over the next six years.”