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Newsletter | May 8, 2024

Powell Goes Soft On Wall Street Again? Can’t Say We Didn’t Warn You

BankingFederal ReserveFinancial Regulation
Powell Goes Soft On Wall Street Again? Can’t Say We Didn’t Warn You

This newsletter was originally published on our Substack. Read and subscribe here.

Before we get into the substance of this newsletter, we wanted to make sure that you heard about what the Federal Trade Commission just dug up: evidence that Scott Sheffield, the former CEO of Texan oil and gas company Pioneer Natural Resources, colluded extensively with top officials involved in the foreign oil cartel OPEC to suppress U.S. fossil fuel production and keep profits high for producers—and costs high for consumers. According to one analysis, such collusion is responsible for causing over a quarter of the inflation people have suffered over the past few years. Stay tuned for a deeper dive into this scandal in our Hackwatch on Friday, and in the meantime, check out Luke Goldstein’s excellent write up on this issue in The American Prospect yesterday.

Will Biden’s Republican Regulator Pick Impede An Overdue Corporate Crackdown?

The corporate crackdown that we at the Revolving Door Project have long advocated for may finally be coming to the finance sector! After nearly a decade of inaction, pay structures that reward excessive risk-taking by bank executives are back in the cross hairs of federal regulators.

In mid-April, outlets like Reuters, Bloomberg, and the Wall Street Journal began reporting on renewed efforts to curb Wall Street bonus pay. Such a policy remains an outstanding component of the policy response to the 2008 financial crisis—a crisis so long ago that a baby born when Lehman failed will be able to vote in the 2026 midterms! How is that possible, you might ask. Well, while the 2010 Dodd-Frank Act was a significant legislative undertaking to reform the financial system, in many ways it can be best understood as a series of instructions to agencies with the technical expertise to write regulations. And the problem with that approach is…what if the agencies don’t do their job? 

There were two previous attempts to fully implement the requirement to write regulations on banker pay in 2011 and 2016. This third attempt comes only a year after the successive failures of several regional banks (including Silicon Valley Bank, Signature Bank, and First Republic Bank) brought the issue of executive bonus pay back to the forefront of the public’s and policymakers’ minds alike. 

On Monday, the Federal Deposit Insurance Corporation (FDIC)—in conjunction with the Office of the Comptroller of the Currency, the National Credit Union Administration, and the Federal Housing Finance Agency—officially announced its notice of proposed rulemaking and request for comment on the Incentive-Based Compensation Arrangement rule. 

Under this regulatory framework, FDIC-covered institutions with at least $1 billion in average total consolidated assets would be subject to increased oversight and prohibitions on incentive-based compensation arrangements that promote unnecessary risk. Furthermore, senior executives at larger banks with at least $50 billion in assets would have to defer a portion of their incentive pay for a set period of time. The cohort of agencies are also seeking feedback on additional regulatory considerations, such as shortening compliance timelines, instituting performance metrics, and “requiring,” rather than “requiring the consideration of,” clawbacks in the event of misconduct.

While the FDIC et al. rulemaking announcement is less than a week old, the rule itself is not “new”. In fact, the vast majority of the regulatory language for this latest proposal was pulled directly from the 2016 proposal; even public comments solicited during the 2016 rulemaking period are being reconsidered. Regulators are simply picking up where they left off before the Trump administration came into office and disrupted proceedings. The biggest difference between then and now however, is the Federal Reserve Board of Governors’ decision not to endorse the rule.

That’s right, despite supporting a nearly identical proposal eight years ago, Fed Chair Jerome Powell has decided this time around to undermine efforts to hold corporate crooks accountable. 

Anyone even the least bit familiar with Powell’s governance history would be unsurprised by such a heel turn. He is, after all, the man who once described Dodd-Frank as “a broad and well-structured agenda to strengthen the resilience of the financial system,” only to go about systematically dismantling the law. After being appointed to Fed Chair in 2017, as my colleague Max Moran outlined in the American Prospect, Powell:

  • Supported Sen. Mike Crapo’s (R-ID) 2018 bank deregulatory omnibus, which, among other things, drastically raised the asset threshold for banks subject to enhanced oversight from the Fed;
  • Altered liquidity coverage ratio requirements to greatly lower, if not completely eliminate, the amount of cash financial institutions were required to keep on hand in case of emergencies;
  • Did away with requirements that banks frequently submit the resolution plans which outline how they would enter bankruptcy without needing the government to bail them out;
  • Lowered stress testing standards; 
  • And “voted for every Fed effort to hack away at the Volcker Rule, the closest thing Dodd-Frank had to Glass-Steagall–style separation of consumer banking and speculation.”

Given such a record, it’s no wonder that Powell would feel so comfortable reneging on his previous commitment to executive accountability. Powell’s devotion to deregulatory bank policy during his first term as Fed Chair was just one of the many (many) reasons why we at the Revolving Door Project staunchly opposed his renomination. And despite the best efforts of political commentators like Robinson Meyer, Matthew Yglesias, and Catherine Rampell to argue otherwise, Powell’s second term has been far from a success. 

In February, my colleague Kenny Stancil questioned whether the aforementioned pundits and others in the pro-Powell camp were ready to admit that they were wrong. We haven’t heard anything publicly yet, but there is no doubt that—at least in private—these cheerleaders have had to eat their words. Whether it be his hawkishness on rate hikes, dovishness on curbing fossil fuel financing, or steadfastness in ensuring that our banking system remains unprepared for the next crisis, Powell has consistently proven himself an obstacle to the Biden administration’s policy agenda rather than an asset.

This latest bonus pay rulemaking proposal offers yet another opportunity to finally make good on long-delayed, common-sense, corporate crackdown policy. The best case outcome is that the expression “third time’s the charm” comes to describe the success of this oversight effort. However, given that the four current signatories, the Securities and Exchange Commission, and the Fed must all agree for this plan to be implemented, the odds are that Jerome Powell will have frustrated a potential populist (and popularist!) accomplishment of the Biden administration.

Follow the Revolving Door Project’s work on whatever platform works for you! You can find us on that website formerly known as Twitter, Bluesky, Instagram, and Facebook

Want more? Check out some of the pieces that we have published or contributed research or thoughts to in the last week:

The Right’s Partners in Weaponized Policymaking

The Mega-Donor Who Colluded With OPEC

Keep Yellen’ At Larry Summers

Covering the Friends of the Court

BankingFederal ReserveFinancial Regulation

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