Bernanke's Blitz: Ally to Adversary on Wall Street
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Bernanke's Blitz: Ally to Adversary on Wall Street

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Federal Board Chairman Ben Bernanke is no devotee of Ayn Rand.  Unlike his predecessor, Alan Greenspan, who promoted free-market capitalism and warned policy makers against stifling private sector innovation, Bernanke is riding roughshod over the banking industry and making plenty of enemies in the process.

The Fed’s aggressive push to implement arguably the toughest new banking rules in a generation has outraged industry executives and their GOP congressional allies who say the new Dodd-Frank financial overhaul law will cripple lending and greatly burden a financial sector that is still struggling to recover from the 2008 meltdown.

"They are becoming much more of an active regulator than they had in the past," Tom Quaadman, a vice president at the U.S. Chamber of Commerce, told The Fiscal Times. "A lot of people in the financial regulatory world think they missed the boat with the last financial crisis. ... The pendulum has swung to the other side of being much more involved in oversight and probably micromanaging a lot more than they had in the past."

The frustration spilled over earlier this month when JPMorgan Chase Chief Executive Jamie Dimon personally confronted Bernanke with industry complaints, asking whether anyone has studied the 300-plus pending rules and their potential adverse costs.  "Has anyone looked at the cumulative effect of all these regulations, and could they be the reason it's taking so long for credit and jobs to come back?" Dimon asked Bernanke. The confrontation took place during a question-and-answer session at the International Monetary Conference in Atlanta, following a series of disappointing reports on manufacturing, housing and jobs.

The tensions are a far cry from a few years ago, when the Fed was seen as the market-friendly regulator and banks jostled to fall under its purview. The Fed's transformation from ally to adversary of Wall Street stems from a combination of Bernanke’s quiet but firm- handed approach and the banking industry’s natural resistance to new government oversight, experts say.

Dimon and others warn that the Wall Street reforms, including additional capital requirements on the biggest banks and curbs on derivatives trading, are causing banks to pull back on lending and are undermining the economic recovery. The proposed changes would result in "a heap of costly standards that will combine in, as yet, unknown ways at a most delicate time in global financial markets," wrote Karen Shaw Petrou, managing partner of Federal Financial Analytics, in a recent research memo.

The banking industry is peeved about new rules set to take effect on July 21 slashing so-called swipe fees that banks charge merchants for debit card use. A furious lobbying push resulted in a legislative proposal to delay the start date and order the Fed back to the drawing boards, but the Senate killed that measure earlier this month. 

But the biggest concern of large banks like JPMorgan, Citigroup and Bank of America is the Fed's plan to raise capital standards to ensure that future financial problems don't destabilize any of the institutions considered too big to fail, to prevent another Lehman Brothers-style failure. Bankers say that if U.S. financial institutions must hold more capital in reserve, they will be at a disadvantage to overseas competitors and will lend less at a time when credit is sorely needed to bolster the economy.

"We have a lot of serious concerns regarding proposed capital surcharges," Quaadman said. "The largest American financial institutions are already dealing with a lot of regulatory restrictions."

The issue of capital was center stage last week at the Basel, Switzerland meeting of international bank regulators, which Bernanke attended. A J.P. Morgan spokesman declined comment beyond Dimon's April letter to shareholders railing against financial regulation

During his press conference last week, Bernanke defended his agency's approach, noting that "Since we can't know exactly what threats will come in the future, probably the best all-purpose way of strengthening the balance sheets of banks, and other financial institutions, is by capital."

In a sense, the Fed has been forced into a corner by Dodd-Frank mandates to impose tough new banking rules. Early on in the 2008 banking crisis, some policy makers suggested stripping the Fed of powers because the regulator failed to spot brewing trouble in the sub-prime housing market and reckless banking practices.

"The Fed came out of that with more power," said Mark Calabria, director of financial regulation studies at the libertarian Cato Institute. "For them to be able to maintain their regulatory authorities, if not expand them, they had to have a different story than they traditionally had."

"Dodd-Frank represents a sea change. There's a real risk that the cure is worse than the disease," said Dan Crowley, head of the capital markets reform group at K&L Gates.

The Fed is limited in how broadly it can interpret the Dodd-Frank law, and in some circumstances -- like swipe fees -- the statute is very prescriptive. But when it comes to implementing new capital standards, the agency is expected to take a case-by-case approach in objectively assessing the risk of each institution and the quality of its capital, Crowley said.

Defenders of the Fed's plan to raise capital requirements argue that it is the only reasonable response to the near-collapse of the financial system, largely caused by excessive leverage by major institutions. An analysis by Stanford University business professor Anat Admati found that higher capital requirements wouldn't harm the capital markets or be inordinately costly. That approach "is likely the most straightforward and cost-effective approach to improving the health and stability of the financial system and preventing future crises," Admati wrote in an open letter to the JPMorgan Chase board. "It must be the key ingredient in any meaningful financial reform and can reduce the need for other, more costly measures." 

Related Links:
Bernanke Public Approval Falls to Lowest with Too-Slow Economy (Bloomberg News) 
Bernanke Defends Stimulus; Takes Boehner to Task (The Fiscal Times) 
Bernanke Rules out Higher Interest Rates for Now (The Fiscal Times)