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. Sheriff: Tarullo at a meeting of the Fed's Board of Governors.  
National Journal
Nancy Cook
Add to Briefcase
Nancy Cook
Oct. 31, 2013, 4:07 p.m.

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.

What We're Following See More »
Mueller Seeks Documents from DOJ
18 minutes ago

Special counsel Robert Mueller "is now demanding documents from the department overseeing his investigation." A source tells ABC News that "Mueller's investigators are keen to obtain emails related to the firing of FBI Director James Comey and the earlier decision of Attorney General Jeff Sessions to recuse himself from the entire matter."

Trump May Be OK with Dropping Mandate Repeal
1 hours ago

"President Donald Trump would not insist on including repeal of an Obama-era health insurance mandate in a bill intended to enact the biggest overhaul of the tax code since the 1980s, a senior White House aide said on Sunday. The version of tax legislation put forward by Senate Republican leaders would remove a requirement in former President Barack Obama’s signature healthcare law that taxes Americans who decline to buy health insurance."

Media Devoting More Resources to Lawmakers’ Sexual Misconduct
2 hours ago

"Members of Congress with histories of mistreating women should be extremely nervous. Major outlets, including CNN, are dedicating substantial newsroom resources to investigating sexual harassment allegations against numerous lawmakers. A Republican source told me he's gotten calls from well-known D.C. reporters who are gathering stories about sleazy members."

Trump to Begin Covering His Own Legal Bills
2 days ago
Steele Says Follow the Money
2 days ago

"Christopher Steele, the former British intelligence officer who wrote the explosive dossier alleging ties between Donald Trump and Russia," says in a new book by The Guardian's Luke Harding that "Trump's land and hotel deals with Russians needed to be examined. ... Steele did not go into further detail, Harding said, but seemed to be referring to a 2008 home sale to the Russian oligarch Dmitry Rybolovlev. Richard Dearlove, who headed the UK foreign-intelligence unit MI6 between 1999 and 2004, said in April that Trump borrowed money from Russia for his business during the 2008 financial crisis."


Welcome to National Journal!

You are currently accessing National Journal from IP access. Please login to access this feature. If you have any questions, please contact your Dedicated Advisor.