Revolving Door Spins Ex-Carlyle Deal-Maker Into Key Fed Role

For Randal Quarles, the 2008 financial crisis presented an opportunity. Then a Carlyle Group managing director, he hunted through the carnage of the banking industry in search of deals and pushed regulators for more leeway.

Now, the lawyer who once sought to topple regulatory obstacles is set to become Wall Street’s chief watchdog, President Donald Trump’s pick as the Federal Reserve’s vice chairman for supervision. To the job widely regarded as the biggest in bank regulation, Quarles brings a view that regulation is more likely to be a problem than a solution.

After two stints both at Treasury and at law firm Davis Polk & Wardwell, where he worked on mergers including the one that created JPMorgan Chase & Co., Quarles joined Carlyle, focusing on grabbing stakes in financial companies. He helped the private-equity firm go on a buying spree after the industry hit bottom, making deals for pieces of several smaller regional banks.

In the vice chairman role, Quarles would be the public face of the Fed’s regulation of Wall Street. He would testify twice a year before Congress, updating lawmakers on the central bank’s work. Still, until Trump can replace her in February, Fed Chair Janet Yellen will have the last say on regulatory matters.

‘Inappropriate Pressures’

Having spent his career studying the banking business and regulations, Quarles declared himself unimpressed by the 2010 Dodd-Frank Act, the U.S. response to the financial crisis, calling it a “failure of ambition” and a “concession to inappropriate pressures,” during a Bloomberg Television interview in 2015.

“In some ways, it was not aggressive enough,” he said. “You could have responded to those pressures with a more aggressive restructuring of the financial regulatory structure of the country without some of the particular provisions that really just aren’t well-designed and were included for political rather than financial regulatory reasons.”

As a Fed vice chairman, Quarles would be in a position to lead a charge against measures including the Volcker Rule, which he has cited as an example of Dodd-Frank’s failings. Trump administration officials have similarly criticized that measure, which people familiar with the matter have said is under review by the Financial Stability Oversight Council, a panel of regulators led by Treasury Secretary Steven Mnuchin. Several agencies, including the Fed, would have to participate in a re-write.

‘Positive Sign’

Trump’s Monday announcement of the planned nomination -- a move that has been floated for months -- is “a positive sign for bigger banks as Quarles should support deregulation,” said Jaret Seiberg, an analyst with Cowen & Co., in a Tuesday note to clients.

“I can’t imagine supporting somebody who seems to be so ideologically aligned with Wall Street, but let him convince us otherwise,” Senator Sherrod Brown of Ohio, the top Democrat on the Banking Committee, said in a statement. “I think he is going to have a tough fight.”

Another key Democrat on the committee, Senator Elizabeth Warren of Massachusetts, has already promised to oppose Quarles, calling him “a dangerous choice for this critical job.”

“In his time in government he demonstrated little appreciation for the risks posed by giant financial institutions,” Warren said in a statement. “His confirmation would weaken Wall Street oversight -- and that’s something no American can afford.”

First Supervisor

Quarles’ arrival at the Fed -- pending Senate confirmation -- would install the Trump administration’s first pick on the seven-member board of governors, where Yellen will continue to control the big-picture agenda until her term expires in February. His four-year term as vice chairman would make him the first person to hold the title, established by Dodd-Frank to increase the profile of banking supervision at the central bank, though he may be the opposite of what Democratic sponsors of the law had in mind.

As a longtime Wall Street lawyer, he was used to pushing the boundaries of regulations. During a 2005 confirmation hearing for a Treasury job, he told lawmakers that he “helped some of the world’s premier financial institutions think through their approach to an increasingly integrated financial system.”

In 2008, he and another managing director at Carlyle wrote an opinion piece for the Wall Street Journal saying the private-equity industry stood ready to flood cash into banks if they could be given leeway to invest without triggering the additional demands of having a controlling interest. “The Federal Reserve and other banking regulators can help remove obstacles to this important pool of capital,” they wrote.

He also might provide some fireworks in another part of the Fed: its role as the arbiter of U.S. monetary policy. He would be among the 12 voting members of the Federal Open Market Committee, and there are reasons to believe that Quarles would support following a formulaic monetary policy rule.

Evidence for that lies mainly in a 2015 interview, in which Quarles said that “if you’re going to be transparent in an activity like the Fed’s, you have to be much more rule-based in what you’re doing.”

Bank Stake

Quarles, 59, left Carlyle and in 2014 co-founded Salt Lake City-based Cynosure Group. The private-equity firm manages money for wealthy families, including that of his wife, Hope Eccles. Quarles brought with him from Carlyle a stake in Brand Group Holdings Inc., a Georgia bank, which heralded the Eccles family as a major investor in a December statement.

Two years before the near-collapse of the U.S. financial system -- before he left Treasury for Carlyle -- he delivered remarks sympathizing with the “unnecessary regulatory burdens” on financial firms, saying it was important to keep an eye on “eliminating outdated regulations and unnecessary requirements.”

Glass-Steagall Act

During his first stint at Treasury, in the early 1990s, Quarles led a study on reforming the financial industry that eventually contributed to ending Glass-Steagall Act separation of commercial banks and investment firms. Trump campaigned on a call for reinstating the Depression-era law, but his lieutenants more recently have made clear that they have no intention of breaking up the big banks that formed in its wake.

A spokeswoman at Cynosure didn’t respond to an email seeking comment from Quarles.

“The nomination of Randy Quarles for vice-chair of supervision represents a step back into the past, not a step forward,” Marcus Stanley, policy director for Americans for Financial Reform, said in a statement. “Quarles was part of the regulatory team at the Bush Treasury Department that missed the oncoming 2008 financial crisis and failed to take any effective action to stop that crisis.”

Quarles has made it clear he favors a less intrusive approach.

“The government should not be a player in the financial sector,” Quarles said on Bloomberg Television. “It should be a referee.”

Charles Plosser, former president of the Philadelphia Fed, called Quarles a “terrific choice” in an interview Tuesday on Bloomberg Television.

“Randy will bring a refreshing view and not fall in line with the group-think that sometimes comes out of Washington,” Plosser said.

— With assistance by Robert Schmidt, Christopher Condon, and Jeanna Smialek