Daniel Tarullo, the Federal Reserve’s point man on overhauling the financial system, has emerged as the most powerful figure wrestling with the nation’s biggest banks to make them take fewer risks that could endanger the economy.
Tarullo, a former Georgetown Law professor and Democratic Party acolyte who was appointed by President Obama to the Fed, is captaining the effort in Washington to make major banks hold more money in emergency reserve — a concern that has gained renewed urgency after JPMorgan Chase last week announced $2 billion in surprise trading losses.
Days before the losses were announced, JPMorgan’s chief executive officer, Jamie Dimon, and executives from Goldman Sachs and other banks lit into the Fed’s plans to tighten oversight during a closed-door meeting with Tarullo in New York. With the executives at his sides, Tarullo sat poker-faced and largely silent. He told the titans of Wall Street that their views were just one perspective the Fed was considering.
In his first public remarks since the JPMorgan debacle, Tarullo said in an interview that the surprise losses buttress the case for tough new rules forcing banks to hold more in reserve.
“I think this, [and] a number of other instances and examples, reaffirms the importance of making sure that our larger institutions have a substantial amount of capital that is available to absorb losses when they come about through unexpected as well as expected means,” he said.
Tarullo has said that the Fed and other regulators failed to effectively regulate the biggest banks before the financial crisis, which erupted in 2008. But as he seeks to avoid repeating that mistake, he is facing fierce resistance from the banking sector — holding far more in reserve is likely to crimp bank profits and executive pay — and some skepticism from international officials and even some Fed staff members.
The financial industry has spent millions of dollars on lobbying to try to shape new regulations, according to public records. Top executives, led by Dimon, have repeatedly bemoaned the impact of new financial regulations.
In private meetings, Tarullo has largely refused to respond to their concerns. He is reluctant to be perceived as negotiating with the banks.
The Dodd-Frank Act of 2010, which overhauled financial regulation, assigned the Fed the responsibility of overseeing the largest financial firms after several massive banks required taxpayer bailouts in 2008.
“He’s right on the cutting edge there of going to battle with the banking industry and other countries,” said Morris Goldstein, senior fellow at the Peterson Institute for International Economics. “Given that the Fed was given all that responsibility, it has a lot of power, and he’s the point guy.”
Last month, Tarullo walked out of a gathering of international bank regulators and executives at the Canadian Embassy after a top U.S. banker criticized the Fed’s new rules. Tarullo asked him to stop, because Fed rules don’t allow officials to engage with executives outside of official meetings. When the executive refused, Tarullo left until the topic changed.
In addition to forcing banks to hold more capital, Tarullo has been pressing for new limits on the types of risks banks can take and for tough “stress tests” to ensure the banks can weather a deep economic decline. As an appointed Fed governor, Tarullo oversees the banking system on behalf of Fed Chairman Ben S. Bernanke, who has had his hands full leading the central bank’s efforts to invigorate the sluggish economy. Tarullo has traditionally voted with Bernanke in favor of measures to stimulate economic growth.
Tarullo considers the late senator Edward M. Kennedy (D-Mass.) to have been his mentor — Tarullo worked as his chief counsel for employment issues — and he helped lead the Clinton White House’s response to the Asian financial crisis in the late 1990s. When he was named to the Fed, Tarullo became one of the first people appointed by President Obama to an economic policy post.
At age 59, he has a puff of white hair and an accent from his upbringing in Boston. He is known inside the Fed for his sharp mind, but he is also known for a brash personality, unafraid to raise his voice and criticize subordinates if he views their work as substandard.
Bank executives say Tarullo has shown little sympathy for their perspective. They say he has offered little explanation for his decisions and pushed for excessively tough rules, going farther than other regulators like.
“He is espousing some ideas that make good sound bites but will hurt the economy and the industry,” said a bank lobbyist, speaking on the condition of anonymity because his clients are overseen by the Fed. “He’s not well liked.”
This lobbyist said financial companies have pushed for the appointment of additional Fed governors to sit on the Fed board to offset Tarullo’s push.
Beyond the new rules, bank executives have taken particular umbrage at Tarullo’s repeated suggestions that financial firms may not need to be as big as they are.
“I’m frustrated by the absence of a better body of knowledge about economies of scale and scope in banking, but I don’t think we’re in a position as regulators to wait for years of research,” Tarullo said in the interview. “I think we’ve got to move now to confine the very real risks or costs of that size and interconnectedness.”
But he said the government has yet to finish its work.
“We need to move to an environment, a world in which large banks can fail and the government can resolve one of these institutions,” he said. “To make that credible there has to be a good bit more capital in the banks.”
Advocates of stricter regulation who have met with Tarullo say they sense a kindred spirit. But they are worried he won’t fight for more dramatic changes that would fundamentally reshape Wall Street. They point to the complexity of numerous rules issued by the Fed and other regulators and raise concerns that banks will find ways around them.
“He’s fairly conservative in the kind of regulations he’s willing to go out a limb for,” said Gerald Epstein, chair of the economics department at the University of Massachussetts at Amherst, who has met with Tarullo twice to push for tougher regulations.
Tarullo has found himself in battles before. At Harvard Law School, where he taught early in his career, he was part of a liberal contingent of lawyers in an ideological struggle with other faculty members. He was denied tenure.
From his current perch, Tarullo has had to spar with more than the financial industry. He has confronted officials in Europe who don’t want to adopt similar regulations and has even tried to push the Fed to become a more aggressive regulator.
After the passage of Dodd-Frank, a group of banking regulators were deciding how to impose new minimum capital requirements. Some Fed economists and lawyers were prepared to interpret the requirements in a way that may have made banks hold less capital than they otherwise would have.
Tarullo, along with former Federal Deposit Insurance Corp. chairwoman Sheila Bair, protested.
“Dan completely changed the dynamic,” Bair said. “I do think the belief in regulation, the commitment to regulation, is uneven among some of the Fed staff.”
Bair is among those who’ve been critical of how the Fed and other regulators have handled the writing of the Volcker Rule, a Dodd-Frank provision that bans banks from speculating with their own money.
Karen Shaw Petrou, managing partner of Federal Financial Analytics, said Tarullo’s job in enforcing new rules will be difficult because the rules have grown so complicated.
“His challenge is going to be overseeing a supervisory process that knows what it is going to do,” Petrou said. “Their ability to execute on all these rules is at best uncertain.”
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