By Simon Johnson
The Obama administration urgently needs to nominate a qualified individual as Undersecretary for Domestic Finance at the Treasury Department. The Dodd-Frank financial reforms are under sustained and determined attack, and the lack of a confirmed Undersecretary is making it significantly harder for Treasury to effectively defend this important legislation. Failing to fill this Undersecretary position would constitute a serious mistake that jeopardizes a signature achievement of this presidency.
In the continuing absence of an Undersecretary for Domestic Finance, the administration has recently displayed an inconsistent – or perhaps even incoherent – policy stance on financial sector issues. On the one hand, in mid-December, the White House agreed to rollback a significant part of Dodd-Frank – the so-called “swaps push-out,” which was shamefully attached at the behest of Citigroup to a must-pass government spending bill. The White House put up little resistance to this tactic and, at the critical moment, lobbied House Democrats to support the repeal of Section 716.
Also in December, the White House pushed hard for the confirmation of a Wall Street executive, Antonio Weiss, as Undersecretary for Domestic Finance. (In mid-January, in the face of continuing legitimate questions about his qualifications, Mr. Weiss withdrew himself from consideration. He has become a Counselor to the Treasury Secretary, but this in no way addresses the need for a well-qualified Undersecretary and the equally pressing need for a consistent administration policy.)
On the other hand, the President has recently issued veto threats to protect financial reform. His first threats were made during the opening two weeks of the new Congress as House Republicans pushed bills to de-regulate Wall Street and rollback financial reform. And, in his State of the Union address last Tuesday night, President Obama threatened to veto any legislative “unraveling” of “the new rules on Wall Street”. In addition, the administration is also proposing a new targeted tax on the liabilities of large banks, motivated by the – well-founded – concern that these banks receive dangerous implicit subsidies from taxpayers. And on January 9, 2015, Treasury Secretary Jack Lew published an article in the Washington Post strongly defending financial reform.
What exactly is the Obama administration’s policy on the financial sector in general and on sticking up for the president’s reform legacy, the Dodd-Frank Act, in particular? Are top officials willing to sell this potential legacy in pieces, as part of deals with Republicans to get spending bills? Or, as is the case with the Affordable Care Act, will the administration refuse to repeal any part of Dodd-Frank – so if the Republicans want to undo any part, they will need to seek enough votes to override any veto?
These questions will be asked repeatedly in the months ahead, including with regard to the Volcker Rule (which limits proprietary trading by big banks) and the orderly resolution authority (Title II of Dodd-Frank, which provides for a government-run bankruptcy process, again for big banks). The Consumer Financial Protection Bureau (CFPB) will also likely come under intense pressure. The big bank lobby is pressing hard on all these dimensions and more – supported, naturally, by large campaign contributions.
The House Republicans show every sign of doing what they can to help Citigroup, JP Morgan Chase, and others remove all effective restrictions on megabanks’ ability to take on large amounts of risk. The big banks want to return to the days of executives getting the upside when things go well and the taxpayer left holding the bag whenever disaster strikes.
The Treasury Department urgently needs to focus intellectual and administrative attention on the substance of defending Dodd-Frank, including shoring up support with Democrats, resisting the political onslaught led by House Republicans, and reaching out to senators of both parties who are willing to help. A key piece of becoming properly organized – intellectually and in terms of liaison with Congress – involves appointing a credible, qualified Undersecretary for Domestic Finance who hits the ground running and really knows what he or she is talking about.
Mr. Weiss’s failed nomination obviously generated a great deal of controversy. And there appear to be hurt and angry feelings among some officials who were in the Weiss corner. But the Undersecretary position is too important – and the financial reform stakes are far too high – for this appointment to be held up by any kind of emotional debris.
There are only three Under Secretaries at the Treasury Department , with responsibilities for: International Affairs; Terrorism and Financial Intelligence; and (all of) Domestic Finance. Leaving Domestic Finance vacant for the remaining two years of this administration would be akin to political malpractice.
Various excuses are being offered for not filling the position of Undersecretary. Some well-placed people say, “if not Weiss, then no one”. Others are more explicit that they think leaving the position vacant will teach a supposed lesson to those – across the political spectrum – who questioned Mr. Weiss’s credentials. And it has even been claimed that no one will want the job after observing the experience of Mr. Weiss.
All of these arguments are, frankly, absurd.
This is a large and well-educated country, with a vast pool of talent – including highly qualified people who would be honored to help defend Dodd-Frank. As for the process, the Weiss nomination failed for reasons that should not impact any candidate with more plausible credentials.
Mr. Weiss’s principal problem was simple: he was not qualified for the job. Contrary to some of the spin from the pro-Weiss camp, this was in no way about having worked on Wall Street. There are plenty of talented people who have worked on Wall Street and who have a proven track record of using that experience to defend financial reform. Two prominent examples spring to mind: Gary Gensler, previously with Goldman Sachs and most recently the pro-reform head of the Commodity Futures Trading Commission; and Sheila Bair, a former New York Stock Exchange executive who was a bastion of pro-reform views while chair of the Federal Deposit Insurance Corporation, 2006-2011. (Full disclosure: I am a member of the independent and non-partisan Systemic Risk Council founded and chaired by Ms. Bair.)
Mr. Weiss did not have the relevant general domain expertise and also lacked a sufficiently convincing grasp of the economic and political details surrounding financial regulation.
The search now should be quite straightforward. Find someone with relevant experience and a good track record – including statements and actions that are on the public record and that demonstrate willingness to challenge the megabanks’ worldview. To make things smoother, this person should not be carrying the kind of extraneous baggage that weighed down Mr. Weiss – such as work on “tax inversions”, or a huge exit payment from a major financial firm, or anything along these lines.
The ideal candidate should be someone with a public and private sector track record along the lines of Gary Gensler or Sheila Bair (both of whom would be great to have fill positions at the very top of this or any future administration). Depth of expertise and experience in dealing with the public policy dimensions of issues such as banks, derivative markets, and asset management will be critical. Ideally, the nominee would bring people (and Senators across party lines) together – although presumably no one can command unanimous support.
There are some very good people at the Treasury Department, but they need stronger engagement with Capitol Hill. The Department must put its best team on the field to resist the myriad lobby-driven efforts that are headed our way.
Nominating a credible Undersecretary for Domestic Finance quickly is an essential step towards helping the Treasury Department most effectively serve the American people – and towards preventing the collapse of financial reform.