The Fed’s Last Troublemaker

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.”

RISE OF AN AGIT­AT­OR

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.

IN­SIDE THE TEMPLE

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.”

THE ROAD AHEAD

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.