Bankers and bank lawyers advising the Fed

My thoughts on new senior advisers at the Fed's Division of Supervision & Regulation

Fed Governor Michelle Bowman - President Trump’s pick for the Fed’s powerful Vice Chair for Supervision, confirmation pending imminently - has made news by hiring as senior advisers three people who are closely affiliated with the banking industry: Francisco Covas, the head of research at the bank lobbyist juggernaut Bank Policy Institute; Aleksandra Wells, a vice president in government affairs at Goldman Sachs; and Randy Guynn, the former head of the law firm Davis Polk’s famed Financial Institutions Group.

Making history

These are remarkable hiring choices that send an important signal about the future of banking supervision and regulation in the US. The Biden Administration, for reasons best known to its key members, never really got bank regulation off the ground. The regional banking crisis didn’t help, but that isn’t the full explanation. Regardless, with soon-to-be Vice Chair Bowman at the helm, aided by these former members or representatives of industry, we can be sure that most questions of bank supervision and regulation will be resolved in ways that the Biden Administration appointees would not have favored.

These appointments also buck to some extent a historical trend. For most of the Fed’s history, the Fed Chair controlled staffing at the Board of Governors (and Reserve Bank presidents controlled staffing at their Banks). In the 1990s, disgruntled members of the Board of Governors (including a young economics professor turned central banker named Janet Yellen) confronted then Chair Alan Greenspan about the asymmetry that these staffing decisions imposed. How could they match the Reserve Banks’ preparation in the FOMC when the Banks had staffs of dozens (or hundreds) and the Governors’ preparation depended on the whims of the Fed Chair. Greenspan agreed and thereafter Governors received dedicated staffers for both monetary policy and supervision & regulation. These staffers were drawn with Governor input from the general staffing pool.

It wasn’t until 2017 and the appointment of Randy Quarles as the first Vice Chair for Supervision that we saw more politically-inflected staffing decisions drawn from outside of the Fed’s own staff. I viewed that change as very healthy. The Vice Chair for Supervision has to make important value judgments that should be in sync with the rest of the Administration. The Fed’s permanent staffers are many things, first and principally public servants who have made significant sacrifices of salary and stress to contribute to the public good, whose work and efforts we should protect and applaud. What they are not and should not be is in sync with those political winds.

Bowman’s choices: lobbyists and lawyers

But Governor Bowman’s picks are not partisan picks to help her stay in sync with Administration priorities. They are people who are part of the banking industry. Some have raised questions about the propriety of such appointments.

I’m of a mixed view on this question. I think appointing lobbyists to these roles is a mistake. Bank lobbyists have one epistemological heuristic at their disposal: banks good, regulation bad. I have had so many conversations with lobbyists over the years. I wish I could have almost all of that time back. I know where the conversation goes before it begins.

For the Fed’s sake, I wish Governor Bowman had not hired lobbyists. I am a political independent (as I am sure readers are probably tired of me repeating), so this isn’t a partisan question. Governor Bowman should hire Republicans to advise her. That’s an important part of democratic accountability and why I applauded then-Vice Chair Barr for his resignation of his leadership role early in the Trump Administration. The people spoke in 2024. We should expect policy to follow.

Bankers and bank lawyers, on the other hand, are different from bank lobbyists. Take Randy Guynn. Guynn is probably the most knowledgeable expert on US banking law in the world. He has also made his career representing the largest banks in the world. Both things are true about him. And while there is no doubt that his ideology and politics are in sync with those of his clients and not with those of the industry’s primary critics, his expertise is simply unmatched.

For example, he recently wrote a blockbuster paper about least cost resolution at the FDIC that no serious person can take to be shilling for banks. Guynn is advocating here for the FDIC to push banks into early resolution as a legal and policy matter. This means that troubled institutions that have not yet failed can be resolved much more cheaply and with much less contagion by the FDIC ahead of that official insolvency. (The details are more complicated, it’s an 80-page paper after all, but this is the gist.)

The heuristic “banks good, regulators bad” fails in this paper. If the FDIC had followed Guynn’s advice on, say, SVB in 2022, the Regional Banking Belch of 2023 (TM) would likely not have occurred. Let’s just say that SVB’s CEO in that counterfactual world would not have been happy with Guynn’s analysis! And indeed, that CEO would likely have called upon the good people at BPI who would have readily and immediately launched lawsuits and NFL commercials to prevent Guynn’s ideas from becoming public policy.

Full disclosure: I don’t know Covas or Wells and do not here impugn their integrity or expertise. I only note that one worked for the most notorious bank lobbyist in the country; the other worked in Government Affairs at one of the largest banks. I don’t doubt that they have subject matter expertise; I just have concerns about whether the heuristics that lobbyists like them invoke to make sense of complexity belong anywhere near the levers of policymaking.

And fuller disclosure: I know Randy Guynn well and consider him a personal friend. Perhaps this post is just me lobbying for my friends and that I am blinded by that bond. I don’t think so, however, not least because I know from informal conversations that I am not the only one who holds these views, even among those who do not know Guynn.

My own conflicts aside, the bigger picture is this: Governor Bowman’s decision to hire outside of the Fed is a healthy one. I applaud it. Recently the Fed announced, yet again, that another Reserve Bank presidency went to another Fed staffer from another Reserve Bank, a trend that has only accelerated in recent years. Again, I feel confident that President Paulson will serve ably and with distinction. But the Fed is too important an institution to be subject to such dramatic recycling of internal staffing. Outside perspectives are vital, whether they are coming from industry or industry critics or Capitol Hill or academia or elsewhere.

So I say three cheers for the decision to bring in outside blood, especially someone of Guynn’s caliber, expertise, and integrity. Moving forward, I hope future Vice Chairs and Governors will follow this tradition. That’s my take-home point: Industry expertise is important and relevant. It can improve the quality of bank supervision and regulation in ways that will be important to watch.

My response to hiring the lobbyists, though, is more negative. It’s a weakly held conviction, to be fair. I would not favor a formal restriction on the hiring of the likes of Covas or Wells. Perhaps they will be able to assess complexity outside the tedious logic of oversimplified lobbyists.

If not, though, then their hiring was a mistake.