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The Fed's Last Troublemaker

Dan Tarullo is committed to curbing Wall Street's excesses. But he has fewer and fewer allies in the Obama administration.


Sheriff: Tarullo at a meeting of the Fed’s Board of Governors.(Chet Susslin)

When Daniel Tarullo arrived at the Federal Reserve Board in January 2009, the economy was still in a free fall. The country had shed 3.6 million jobs in the past year, with cuts at major companies like Home Depot, Microsoft, and Boeing. Across the U.S., home prices had dropped precipitously. And, two days after Tarullo assumed his post as one of seven Federal Reserve governors—some of the most powerful economic officials in the world—the stock market plunged and recorded one of its worst drops on record for the month of January.

To those at the Fed, the mission was critical, fundamental, and starkly clear. It was nothing less than the rescue of the American economy itself. Tarullo was, at first blush, not the obvious choice to be drafted for such a task. At 60, with his white hair and bushy eyebrows and his habit of turning conversations into lectures, he appeared less of an economist than a professor—which is what, in fact, he was.


Tarullo arrived at the Fed with a mandate from President Obama: to shore up the banking system to prevent another major, global financial crisis. Unlike previous bank regulators and supervisors, he went further, pushed harder, and accumulated massive power, all while alienating some inside the cloistered, genteel Federal Reserve and those outside in the banking industry as well with his combustible style.

His clout was evident almost from the start, when Chairman Ben Bernanke essentially divided up the central bank's long To Do list after the financial crisis and gave Tarullo great leeway to formulate the Fed's regulatory reaction. Still, while it was a massive set of responsibilities, Bernanke reserved the most important, most immediate—and sexier—job for himself: wrestling with the country's monetary policy.

One former Fed staffer remembers a meeting in 2009, when Bernanke made his trust in Tarullo evident. As Bernanke prepped for a handful of upcoming appearances, he turned to Tarullo and asked him what he, the leader of the Fed, should say about the state of banking law. "They had a clear understanding," recalls the former Fed staffer: Tarullo was going to take the lead on financial regulation and work with the Treasury Department and members of Congress, while Bernanke would focus on the high-level questions such as inflation and boosting the economy. "We were in the middle of a crisis," the staffer says. "Someone needed to play point on regulation reform."


Few people outside of Washington could tell you much about Tarullo. Yet, essentially he is the last rabble-rouser on fiscal reform left in the Obama administration, who is fighting overtime to permanently tamp down Wall Street's excesses. He remains irritated by the delay in finalizing major portions of the Dodd-Frank law, and he continues to push for more-stringent and nuanced rules even as the banking industry tries to slow the new regulations, such as the "Volcker Rule." Of course, the further the U.S. moves away from the global financial meltdown, the harder it becomes to justify the reach of Dodd-Frank—making Tarullo's goals more elusive than ever.

"I knew the industry would shift to a waiting-game strategy, which they have," says Sheila Bair, the ex-chairwoman of the U.S. Federal Deposit Insurance Corp. and one of Tarullo's former fellow regulators. "Reform advocates get tired. The public gets cynical, and people forget how bad it was. It gets harder and harder to implement the longer these regulators wait."

Now, it's as if Tarullo is the lone sheriff of our postrecession economy—Gary Cooper in an old Western, standing in the town square during the hottest part of day. That's an especially lonely place to work because Tarullo's fellow instigators, such as Bair and Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission, have either left the administration or are on their way out at the end of this year. "If you want to rate bank regulators, then Tarullo and Gary Gensler look like the hawks," says Alan Blinder, a former Federal Reserve governor and a friend of Tarullo's. "His views on bank regulations are much more right than wrong, and there are not many regulators you can say that about in this last decade."

None of this has dulled Tarullo's hawkishness. "By and large, people don't like to be regulated," he says from his Federal Reserve office. "It's a fact of life that financial institutions are going to be regulated in a way that they weren't in the 1990s and before the financial crisis." Besides, he adds, "I'd be a little worried if [the bankers] thought I was their friend."



Tarullo grew up in Massachusetts, coming of age during the time of the Civil Rights Act and the Vietnam War. He went against the grain early on with his choice for a college major: English at Georgetown University instead of political science, economics, or government. (He's still a huge reader of fiction, especially the work of William Faulkner.) After studying law at the University of Michigan, he returned to his native state to teach at Harvard Law School.

There, he ran into a buzz saw. He and two other young professors were denied tenure largely because of their association with the Critical Legal Studies movement, then a highly criticized school of thought that argued that factors such as economic mobility and social oppression should be taken into account in the disposition of legal disputes. Tarullo's ideas clashed with the established order at the law school, with tenure a major battleground, according to articles by the Harvard Crimson at the time. "It was very disconcerting as it happened," Tarullo remembers. "If you think about, if I had gotten tenure then … I would not have gone to work for Senator [Edward] Kennedy right away. That began for me what was a very fortunate streak of really good, timely jobs at the right moment."

Indeed, Tarullo jumped from the wilds of academia to the swamp of politics, landing in Kennedy's office, where he was a senior policy adviser on employment issues. He campaigned for Michael Dukakis for president, and he later worked in the Clinton administration in a number of senior roles in international economic policy and trade, along with contemporaries such as Lawrence Summers and Jacob Lew.

After leaving the Clinton White House, Tarullo became preoccupied with the nation's crazy-quilt set of financial regulations. He joined the faculty at Georgetown University Law Center. Banking became his next obsession. And he began to develop his own, jaundiced view of the system.

"There had been a fundamental shift as the industry had changed. Capital markets and traditional lending had become more integrated," he says. Regulators tried to keep commercial lending booming by chipping away at the regulations and structure put in place by the New Deal, culminating in the congressional act in 1999 that largely eliminated the divisions between traditional and investment banking.

By the time Tarullo encountered a young Sen. Barack Obama in Congress, he had built a reputation as a liberal reformer, someone who stood up to the big banks and embraced regulation. Tarullo joined Obama's 2008 campaign and was rewarded when the new president made him his first nominee to the Fed. In the wake of the collapse of Bear Stearns and Lehman Brothers, Tarullo seemed well-matched to the moment. "Obviously, the whole financial crisis shook the institution [of the Federal Reserve], no matter if you were involved with supervisory, regulatory, or monetary policy. It didn't much matter," Tarullo says.


Tarullo's office sits on the Fed's second floor, among corridors so quiet that it seems like a museum. Photographs of Tarullo's grandchildren line the mantel. The wall above his desk shows his Massachusetts roots with pictures of the Red Sox and the town of Gloucester, where he and his family take beach vacations.

As a member of the Board of Governors, Tarullo acts as the institution's lead for financial regulation. He's responsible for setting the agenda for the independent Fed's supervision and regulation of banks—everything from the amount of long-term debt they hold, to requirements about the amount of capital they must keep, to international banking laws, to the stress tests that ensure the banks can handle another financial shock.

It's a huge portfolio that allows Tarullo to help write the regulations for Dodd-Frank, as well as propose additional, even stricter standards. At his disposal are hundreds of well-trained Fed employees, academics, economists, and bank supervisors to help him implement his agenda.

Bernanke's delegation of power left Tarullo in charge of thinking through a new system of financial regulation—an area that he had spent more than a decade studying in academia. Tarullo was ideally suited to work with Congress to develop Dodd-Frank and, later, write the regulations. "He took control quickly. He had some ideas because he had written on Basel [international bank regulations]. There was not a big learning curve for him to climb," says Donald Kohn, a former Fed governor.

Quickly, Tarullo set out to reshape the way that the Fed oversaw banking. He beefed up staffing in the bank-supervision division at the Board of Governors, from 255 employees in 2008 to 383 as of 2012, according to Fed data. And he had little patience for the status quo: Former Fed staffers say he was dismissive of employees he had inherited who had stood by as two major Wall Street institutions collapsed. "He basically labeled that group as the people who caused the financial crisis," says one former Fed employee. Eventually, eight top people from the division either retired or took positions in the private sector.

Tarullo was determined to shake up the culture. He altered the way the division and committee did business, a move that remains divisive among Federal Reserve employees. He reduced the number of staffers who typically attend policy meetings and offer input, preferring smaller groups of two or three to more-typical meetings of 15 or more employees. He started to lean heavily on two top lieutenants, Mark E. Van Der Weide and Anna Lee Hewko, instead of a wider range of Fed career employees. Critics say he was silencing dissent. "He was a change agent, and everyone got out of his way," says one former staffer. "I'm much more fond of him looking back than I was at the time."

Then, there is Tarullo's temper. Ask Fed staffers about it, and they can trade tales about which Tarullo blowup was the most legendary. He's even publicly dressed down staffers he likes. Once, Tarullo threw a stack of papers at Kieran Fallon, then the associate general counsel for legislation at the Fed, according to four staffers who Fallon later confided in about the incident. The reason? Tarullo did not like the way that Fallon had drafted a rule. (Both Tarullo and Fallon declined to address the incident.)

Tarullo has even clashed with Vice Chairwoman Janet Yellen, whom the president nominated recently to replace Bernanke, something that one source who knows both of them calls "an open secret inside the building." "It's not a dispute over policy differences," says the source, describing their differences. "It's much more of an issue of personal style, with Dan thinking he has the right to dominate the regulatory sphere, and Janet thinking, 'I'm the vice chair of this organization and I outrank you. You should at least tell me something.' "

Even before Yellen arrived at the Federal Reserve in Washington, the two didn't see eye to eye over the stress testing of big banks, according to two former Federal Reserve staffers. At that time, Yellen served as the head of the San Francisco Fed, one of the central bank's regional districts, and thought that Wells Fargo, one of the banks in her district, should not be treated the same during the stress tests as some other large institutions. Tarullo eventually came around to her point of view after a few rounds of negotiations and phone calls, the staffers say.

Tarullo's no favorite of the financial-services industry, either—as much as for his dismissive demeanor as for his principles. He looks at the ceiling when speaking, not at anyone at the table. He shows no interest in compromise. The nicest compliment one financial-services executive could muster about Tarullo was that he shows up. "He certainly is accessible," says the senior exec for a financial-services industry association, who asked to remain anonymous to speak candidly about a Federal Reserve official. "He'll come to the meetings, but I don't know if he is convincible of anything. He sticks to his positions."

The president and CEO of the Independent Community Bankers of America, Camden Fine, remembers one meeting that Tarullo invited him to where the two argued for three hours over the same set of points. "He fires off his question…. It is a rather different meeting with him than I've had with other Fed governors," says Fine, whose trade association represents 7,000 community banks. Their meeting produced nothing. "We left the room pretty much as we entered it," Fine says. Other bankers and lobbyists describe similar reactions from Tarullo.

But as he will be the first to say, Tarullo isn't at the Fed to win over the banking industry. Yet, despite his status as a progressive hero, there's a strong chance his efforts will fall short. Regulators have yet to finalize the majority of bank regulations promulgated under Dodd-Frank. Few observers believe the law will prevent another major financial crisis or reduce the sway of major banks. "If the whole purpose of Dodd-Frank was to eliminate this concept of too-big-to-fail and you judge it by that standard, then it's a failure," says Cornelius Hurley, a professor of banking law at Boston University and a former assistant general counsel of the Board of Governors of the Federal Reserve system. "If I had to give it a grade, I'd give it a D."

Tarullo knows the ultimate reach of Dodd-Frank is still up for grabs. "It remains to be judged by journalists, academics, and the public—whether, in the end, the outcome of the whole thing was worth all of that along the way," he says. The regulatory delays remain a source of frustration. Nearly five years since he joined the Fed and five years after the start of the financial crisis, just over 40 percent of the rules have been finalized by Treasury and other agencies, according to Davis Polk, a law firm that tracks the law's progress. Obama and Treasury Secretary Jacob Lew promised over the summer to try to finish Dodd-Frank by the end of this year, but that seems overly optimistic now.

"You know, the American people don't much care whether my job is frustrating or not," Tarullo says. "The question is: What's the best outcome? I think the jury is still out on whether this process will produce, in the end, a more considered set of regulations or not."


Even after the regs are finished, bank regulators still need to enforce them stringently for them to matter, and this reality promises to be another potential disappointment to Tarullo. While he oversees bank supervision and regulation at the Federal Reserve, overall, a patchwork of government agencies from the FDIC to the SEC to the Office of the Comptroller of the Currency regulates the financial system.

"The thing about Dodd-Frank is that it provides a lot of regulatory authority but mostly in general terms, so how that authority is exercised needs a lot of shaping," Tarullo says. Many of the regulations being put forth are difficult to enforce because of the many caveats and questions that accompany them. "I think the regulators—and this is not Tarullo's fault, but he's gone along with it—they've lost the appreciation for clarity and simplicity," says Hurley, the law professor. "They've gotten all tangled up in their complicated formula."

Still, Tarullo has made some progress since 2009. He has cemented the Fed's dominant role in financial regulation and bank supervision out of its central Washington office, even though the largest banks are primarily clustered in New York City near the regional New York Federal Reserve. He shifted the processes internally at the Fed to push for more quantitative analysis and to look at risk-taking across the system. He's proposed a number of ideas to reduce the footprint, complexity, and influence of the largest banks across the global financial system—from new rules on liquidity to a push to change the structure of the wholesale funding markets, where banks turn for cash in a pinch.

But that's where the list could end. There's no guarantee, for instance, that Tarullo's own mini-empire inside the Fed will remain intact once Yellen takes over and the president appoints other Fed governors. Four out of the seven governor seats are expected to turn over in the coming year; each new appointment brings with it a wave of reeducation about the Fed's stances on bank regulation, not to mention new alliances for Tarullo to try to build to keep his agenda alive. "Everyone's role will change. It's a big moment for the Fed," says Simon Johnson, an economist and professor at MIT's Sloan School of Management.

One wrinkle may come if the White House appoints someone to the post of vice chair of supervision—a new role inside the Federal Reserve, created by Dodd-Frank. It's a position that has sat vacant since its inception and requires Senate confirmation. Tarullo has acted as the de facto vice chair of supervision since his arrival, but he never got the formal nod for the post. Longtime Fed observers predict that the appointment of someone else to that position could cause friction with Tarullo, who will zealously guard his turf.

There's also no guarantee that Tarullo will stick around for the duration of Yellen's term as chairwoman, assuming she gets confirmed. Governors typically serve for five to eight years, and, as of January, Tarullo will have served for a remarkably hectic five. Longtime Fed watchers say that Tarullo may leave early in Yellen's tenure, possibly as soon as this winter or spring—a fact that Tarullo does not confirm or deny. "When and whether I go is dependent on a lot of things, but the identity of the chair, that wouldn't be an important factor," Tarullo says.

The question over the next decade is whether Tarullo won or lost in his battle to regulate the country's largest banks—and if all of the regulations he fought for behind the scenes will matter, particularly if another financial crisis hits. Banks now have had three years since the passage of the 2010 Dodd-Frank Act to lobby and strategize about ways to circumvent or fight the law, and Tarullo's vigilante approach to bank regulations may not matter if he does not remain at the Fed to keep watch over its supervisory power.

Democratic Sen. Sherrod Brown, a member of the Banking Committee who has worked closely with Tarullo, says absent another calamity, it may be impossible to know whether reform has been effective. "I don't expect one day to say that Wall Street lost. We won," he says. "It's a question of degrees…. It's never as safe as we'd like it to be."

Knowing Tarullo, that's not going to be a good enough answer.

This article appears in the November 2, 2013 edition of National Journal Magazine as High Noon for Dan Tarullo.

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