Trump's Pick for Bank Watchdog Ripped for Pre-Crisis Performance

  • Fed nominee Quarles says he should have done more before bust
  • OCC pick Joseph Otting defends his tenure running OneWest

Trump Nominates Quarles as Fed's Top Bank Regulator

Randal Quarles, President Donald Trump’s pick to be Wall Street’s top regulator, conceded that he should have been tougher on banks during a stint at the Treasury Department before the 2008 financial crisis. 

That isn’t insulating him from attacks from Democratic lawmakers, who say his past inaction makes him a poor choice for his new role.

Facing withering criticism at a Senate confirmation hearing Thursday, Quarles said “with the benefit of hindsight, we could have been more aggressive.” Trump has nominated Quarles to be the Federal Reserve’s vice chairman of supervision, which would make him the U.S.’s most influential bank watchdog.

Senator Sherrod Brown, the Senate Banking Committee’s top Democrat, said Quarles seemed “asleep at the switch” when he worked at Treasury more than a decade ago for not doing more to respond to rising home foreclosures and other dangers that were building in the financial system.

Quarles told members of the banking panel that Treasury failed to act more quickly because of political headwinds, though he said he and others in George W. Bush’s administration had ideas at the time for improving Wall Street oversight. Still, Ohio’s Brown chided him for making optimistic comments just before the economy headed for a meltdown.

2006 Remarks

“The economy is strong, the financial sector is healthy, and our future looks bright,” Quarles said in a 2006 speech, two years before the near-collapse of the financial system that prompted Congress to rescue banks with a $700 billion taxpayer bailout.

Democrats’ criticism of Quarles was contrasted by Republicans. They praised his depth of experience, and that of another key nominee who testified at Thursday’s hearing: Joseph Otting, Trump’s choice to run the Office of the Comptroller of the Currency. 

GOP lawmakers also liked that Quarles and Otting said it’s time to take a fresh look at regulations imposed on banks after the crisis, including capital and leverage rules that Wall Street blames for unnecessarily curtailing lending and hurting profits. The two nominees are likely to be confirmed because Republicans can approve them without any Democratic support.

Otting spent much of the hearing defending his tenure as chief executive officer of OneWest Bank, a lender that foreclosed on tens of thousands of homes in the years after the housing bust. OneWest had a “very low error rate” in its handling of troubled mortgages, Otting said, adding that he prefers to focus on the fact that a majority of the bank’s borrowers were able to remain in their homes. Treasury Secretary Steven Mnuchin was OneWest’s chairman when Otting ran the lender.  

Hurting Seniors

“Mr. Otting’s bank made money by kicking seniors out of their homes, and then turned around and said the government made them do it,” Senator Brown said.

Senator Elizabeth Warren, a Massachusetts Democrat well-known for sparring with financial executives, said Quarles’ time at Treasury is “not a track record that should give Americans a whole lot of confidence in you.” Arguing that he’s shown no willingness to take on the industry, she tried to get him to admit that his views are in lockstep with Wall Street. Quarles’ careful responses to her questions revealed little about his plans.

He did say he favors giving banks a lot more information about how the Fed conducts its annual stress tests that measure big lenders’ ability to weather a hypothetical crisis. Quarles added that he also supports simplifying the Volcker Rule, which restricts lenders from investing with their own money.

Quarles and Otting agreed that the insurance industry is less likely than banks to pose a risk to the financial system. That position could be important as the Financial Stability Oversight Council that they’ll be members of rethinks whether insurers deserve tough oversight. FSOC has power to label companies “systemically important,” a label that subjects them to greater scrutiny than other firms.

Both Quarles and Otting have amassed substantial wealth from the finance industry they’ve now been tasked to regulate, according to their financial disclosures. They each pledged to shed millions in bank stocks before they join the government, and Quarles said he’d sell stakes in several lenders he obtained during his private-equity career.

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