It’s safe to say that Sen. Elizabeth Warren (D-MA) has as broad a public reach as any politician today. Her opening statement for the Middle Class Prosperity Project Forum, something she and Rep. Elijah Cummings conceived out of thin air, got 1 million Facebook views in less than 24 hours.
So it’s significant when she uses this platform to steer supporters toward investigating government’s seedy underbelly, where the real decisions get made. For example, this week, Warren authored an op-ed about something called investor-state dispute resolution, the obscure provision in trade deals that allows corporations to sue governments in outside tribunals to overturn sovereign laws. She also wrote a letter to the Education Department, highlighting a hidden taxpayer bailout of for-profit Corinthian Colleges, which forced defrauded students to pay off worthless loans.
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Perhaps her biggest teaching lesson this week introduced the nation to Scott Alvarez, general counsel of the Federal Reserve. Alvarez is the most important public official nobody knows about, yet he wields tremendous power over Fed policy, especially on financial regulation. This derives from his ability to lurk in the shadows and affect the process unobstructed. Warren’s public call-out could change that dynamic.
What you need to know first about Scott Alvarez is that he was appointed to his position by Alan Greenspan, and he fully shares Greenspan’s laissez-faire views on regulation. A Fed staffer since the 1980s, Alvarez has participated in virtually every deregulatory maneuver of the past 35 years. He helped draft the law that formally eliminated the Glass-Steagall separation of commercial and investment banking and resisted using the Fed’s consumer protection authority to tame the runaway mortgage market during the housing bubble. Now, with a team of over 50 lawyers who analyze all rulemaking, supervisory actions and legal guidance, Alvarez can influence Fed work product at the staff level. In short, he controls what the Fed leadership sees.
Fed governors may think they’re in charge, but Alvarez has repeatedly contradicted their stated goals in public. For example, last fall, New York Fed Chair William Dudley and Daniel Tarullo, a Fed governor and point person on financial regulation, each gave speeches on the need to influence the culture of greed and risk-taking on Wall Street. Weeks later, Alvarez said, “culture is not something that we feel we can regulate.”
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In the same speech, given to bank lawyers at the American Bar Association conference, Alvarez pointed out which parts of Dodd-Frank he wanted to see repealed, an odd posture for a public official at an agency implementing the law. Even tame rules like the SEC’s Dodd-Frank provisions on credit rating agencies are “more constraining than I think is helpful,” Alvarez said.
Alvarez’ biggest targets in that speech were rules to push out swaps trading to separately capitalized entities (“You can tell it was written at 2:30 in the morning,” he said), and the Volcker rule, which limits banks from risky trading on their own accounts. And in a show of Alvarez’ clout, these suggestions became the law in a matter of months.
Last December, Congress killed the swaps push-out, over Warren’s objections, with a rider placed into a must-pass bill. That same month, the Fed had opted to delay implementation of key elements of the Volcker rule, letting banks keep investments like collateralized loan obligations (CLOs) on their books. The Fed had to break Dodd-Frank rules allowing it to delay provisions only one year at a time by announcing its “intention to act next year” 13 months early. At least one Democratic aide openly blamed Alvarez for the Volcker rule delay; it wasn’t the first time he was implicated in watering it down.
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Having a mole inside the Federal Reserve, able to defy the will of the leadership, implement deregulatory policies and signal Congress to act finally became too much for Warren. Questioning Fed Chair Janet Yellen at a Senate Banking Committee hearing on Wednesday, Warren started by noting that Alvarez failed to brief her, as requested, on a leak of information from a private 2012 Fed meeting, used to move markets.
Then, she highlighted Alvarez’ American Bar Association comments, and how they line up with recent actions to weaken Dodd-Frank. Warren asked Yellen, “Do his criticisms reflect your criticisms?” Yellen said that she was not interested in altering Dodd-Frank in any way, an evasive answer, considering that the Fed did delay the Volcker rule as per Alvarez’ suggestions.
“Do you think it’s appropriate that Mr. Alvarez took public positions that do not evidently reflect the public position of the Fed’s board, especially before an audience that has a direct financial interest in how the Fed enforces its rules?” Warren probed. Yellen again dodged, saying they’re not seeking to change the rules, a remarkable statement for a federal agency head to have to make.
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Warren is protesting how Alvarez can subtly operate on the side of big banks, against the public interest. When he tells bank lawyers what parts of Dodd-Frank he’d kill, he gives them a roadmap for where they’ll get official support for undermining the law. When the Fed delays the effective date of certain regulations, he gives space for bank lobbyists to gut the rules. Warren brought up just this point about the swaps push-out (which the Fed delayed until 2016 before the provision was eliminated), and Yellen said she didn’t know Alvarez’ role. But as general counsel, it’s impossible that he wasn’t involved.
Yellen left no doubt who she sided with after the hearing, releasing a written statement backing Alvarez. “My colleagues and I depend, with confidence, on Scott Alvarez’ expert advice and counsel,” Yellen wrote. “He is a dedicated public servant who is committed to thoughtful public policy.”
This is what makes change at the Fed so difficult. In her confirmation hearing, Yellen committed to prioritizing financial regulation at the level of principals, rather than delegating to staff. But her statement effectively sanctioning Alvarez’ conduct suggests that he still heavily influences decisions behind the scenes. There’s too little transparency about his role, but calling him the power behind the throne, as Jesse Eisinger did in 2013, does not seem far-fetched.
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There are two ways to deal with this. One is to simply fire Alvarez for acting at cross-purposes with the leadership’s stated goals. A similar tactic, when Office of the Comptroller of the Currency head Thomas Curry fired pro-bank General Counsel Julie Williams, significantly improved that agency. “The Fed’s general counsel… should not be picking or choosing which rules to enforce based on their personal views,” Warren told Yellen at this week’s hearing.
But Yellen, by her statement, has already ruled out dumping Alvarez, and it’s not certain that there’s any real daylight between the two on regulatory priorities. So the other option is to increase transparency at the Fed, to help the public understand who decides on these monumentally important issues and why.
Warren has come out against the “Audit the Fed” bill being pushed by Sen. Rand Paul (R-KY) because of concerns about “meddling in monetary policy decisions.” But the situation with Alvarez clearly shows that the Fed is too opaque and cloistered, such that an obscure staffer can overpower the process.
The larger point about auditing the Fed is piercing this veil of secrecy. Just having a popular senator exposing Scott Alvarez to the light of day helps in that effort. But we can go further to ensure that one man doesn’t hold the nation’s regulatory posture almost entirely in his hands.
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