Key vacancies give Obama a chance to steer financial reform

By Binyamin Appelbaum
Washington Post Staff Writer
Monday, March 8, 2010

President Obama has the chance during his first term to appoint leaders for each of the federal agencies that oversee banks, an important opportunity to reshape the government's approach to regulation even as the White House struggles to push structural reforms through the Senate.

In his first such decision, Obama chose to keep Ben S. Bernanke as chairman of the Federal Reserve, in part because administration officials concluded that Bernanke had demonstrated a commitment to increasing the Fed's focus on regulation and consumer protection. The administration also appointed a second Fed governor, Daniel K. Tarullo, to lead an overhaul of the central bank's approach to regulation.

A second opportunity comes in August, when John C. Dugan reaches the end of his term as comptroller of the currency, the chief regulator for most of the nation's largest banks.

In addition, the Senate is moving toward legislation that would authorize the president to appoint a new regulator devoted to protecting consumers from abuse by lenders.

The hiring opportunities, which also include a vacancy at the Office of Thrift Supervision and the end of Sheila C. Bair's term as chairman of the Federal Deposit Insurance Corp. in June 2011, will allow the White House greater control over the implementation of financial reform legislation.

"You want to make sure you're not going to have someone countermand the legislation through regulatory interpretations," said Lawrence Kaplan, a former banking regulator who is now a lawyer at Paul Hastings. "You want someone that you have full faith that they'll carry out the intentions of the administration."

The passage of reform legislation could change the list of vacancies. Banking regulation currently is divided among four federal agencies, the result of a succession of reform efforts that created a patchwork rather than a master plan. The latest round of reform could leave as few as two presidentially appointed regulators, or as many as five.

Perhaps the most anticipated vacancy is at the Office of the Comptroller of the Currency. Dugan, appointed by President George W. Bush in August 2005, is a banking lawyer by profession. His tenure has been marked by repeated conflicts with state regulators as the OCC asserted an exclusive right to police the activities of banks with national charters, a doctrine known as preemption.

The banking industry argues that the efficiency of operating under a single set of rules generally results in lower prices for customers. Consumer advocates have savaged the OCC policy, arguing that preemption contributed to the financial crisis by preventing state regulators from quashing obvious abuses.

Despite those critiques, the courts generally have sided with the OCC, upholding its right to preempt state laws.

The Obama administration proposed an end to that policy as part of its blueprint for financial regulatory reform, but conservative House Democrats forced party leaders to preserve the OCC's authority in the financial reform bill that the House passed in November. The Senate still is drafting its version.

Dugan also has expressed concerns about the administration's proposal to create a freestanding agency devoted to protecting borrowers from abuse by lenders. In testimony before the Senate Banking Committee last year, Dugan said banking regulators should continue to enforce consumer protection laws.

These ideological differences led to speculation that Obama would ask Dugan to resign before the end of his term. The administration decided against it in part because of the need for continuity and stability during a financial crisis, according to sources familiar with the decision.

Dugan's replacement may lead a larger agency. The financial reform legislation passed by the House would merge the Office of Thrift Supervision into the comptroller's office. The OTS, which oversees banks that specialize in mortgage lending, regulated many of the largest banks that failed during the crisis. Its last director, John Reich, resigned in February 2009. The agency is on its second interim director.

The FDIC also may expand its mission. The agency now divides oversight of state-chartered banks with the Fed, but senators are considering giving the FDIC sole responsibility.

Political affiliation could play a counterintuitive role in the appointment process. Federal law stipulates that the FDIC's five-member board can include no more than three members of the same party. The heads of the FDIC, OCC and OTS all hold seats on the board, and some proposals would grant seats to the Fed and the new consumer regulator. That could force the administration to consider independent and Republican candidates.

© 2010 The Washington Post Company