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September 20, 2011

Dodd-Frank Backers Clash With Regulator


WASHINGTON — John Walsh voiced the frustrations of many bankers when he warned in a speech last month that federal regulators were not paying attention to the cumulative impact of new rules and restrictions, jeopardizing the ability of banks to support economic growth.

“I might have titled these remarks, ‘Beware of the Pendulum,’ ” he said. “To put it plainly, my view is that we are in danger of trying to squeeze too much risk and complexity out of banking.”

What made the speech unusual was that Mr. Walsh is a federal regulator. In fact, he is responsible for overseeing most of the nation’s large banks. And as the text of his remarks ricocheted across the electronic landscape of official Washington, it drew a furious reaction from advocates of increased regulation, who called on the White House to replace him.

The uproar brought into public view the increasingly contentious relationship between the authors and supporters of the Dodd-Frank Act, the law passed last year to overhaul financial regulation, and Mr. Walsh, the acting comptroller of the currency, a crucial player in the work of translating the law into practice.

His agency is seeking to soften a wide range of provisions, in areas ranging from the bread-and-butter of consumer protection to the esoteric details of how much money banks can borrow. Democrats and consumer advocates are particularly infuriated because Mr. Walsh, who stepped in as acting director in August, could be replaced by the White House at any time.

“The O.C.C. is acting as if there was never a financial crisis,” said Dennis Kelleher, president of Better Markets, a nonprofit group that advocates for increased regulation of the financial industry. “It’s just an utterly indefensible abdication of its responsibility to the American people.”

Mr. Walsh said in a recent interview that he was bewildered by the anger of his critics. He said that the financial crisis revealed clear problems that his agency was working to fix, but that it wanted to protect at the same time the viability and vigor of the banking industry. The disputes with other parts of the government are not questions of which way to go, but how far.

“I think we’re in a moment in time where if you say anything that suggests you see merit in an argument that is supported by bankers, that you’re somehow selling out your public office or something,” Mr. Walsh said. “And I just don’t agree with that.”

Mr. Walsh, who joined the agency in 2005 and served as chief of staff, took over in August when John Dugan, a Bush appointee, completed his five-year term. Almost a year later, his office in Southwest Washington remains lightly decorated; the distinctive feature is a looking glass pointed toward the Capitol.

Last month, the president nominated Thomas J. Curry, a member of the board of the Federal Deposit Insurance Corporation, to head the agency. He will appear Tuesday before the Senate Banking Committee, but there is no assurance that Republicans will permit a vote.

The most visible battle concerns the agency’s power to exempt banks chartered by the federal government — a category that includes most large banks — from compliance with a hodge-podge of state banking laws.

The Dodd-Frank Act includes language meant to limit this power and to require a review of past exemptions. Earlier this year, however, the agency said the law did not compel any change in its policies. The Treasury Department protested that that ignored the law’s plain meaning. But on Wednesday, the comptroller’s office said that it stood by all of its previous decisions.

The stand is strongly supported by the banking industry, and by many members of Congress, who argue that the efficiency of a single rulebook is fair and results in lower prices for customers.

Advocates of state regulation, however, are girding for a court battle.

“It’s really hard for me to think how much clearer Congress could have been,” said Arthur E. Wilmarth Jr., a professor of financial law at George Washington University. He said the agency was behaving like Lewis Carroll’s Humpty Dumpty, who memorably declared, “When I use a word it means just what I choose it to mean — neither more nor less.”

The agency also faces criticism over continuing revelations that banks under its supervision have routinely failed to follow the legalities of the foreclosure process. When it announced that it would require banks to conduct comprehensive reviews, and to pay compensation for any problems that were found, critics questioned its competence and sincerity.

“Banks will face penalties,” Mr. Walsh said. ”To do this right will take some time. But if the process is going to be credible and people are going to be able to believe that we can deal with it fairly, we’re going to have to take the time to do the work right.”

In the meantime, the agency is juggling 85 projects dictated by Dodd-Frank. And its greatest impact is likely to unfold far from public view, in the closed-door meetings and long, dense legal opinions where regulations are built and tuned.

In one typical example, the agency is pressing other regulators to accept an inclusive definition of the word “customer.” The Volcker Rule, written into the Dodd-Frank law to limit banks from pursuing their own investments, allows banks to create hedge funds and private equity funds so long as they are quickly marketed and sold to customers. The authors and proponents of the rule want regulators to define the term as narrowly as possible, limiting the opportunity for banks to create products and then identify a willing buyer after the fact. The comptroller’s office, however, has suggested using the expansive definition of a customer found in the Patriot Act.

The agency’s positions reflect its view that banks should be permitted to engage in a broad range of activities, for their own health and for the benefit of the broader economy. Over the years, the agency gradually eased restrictions to allow the rise of behemoths like JPMorgan Chase and Bank of America, and now it is defending those expansive boundaries.

Mr. Walsh said his greatest concern was for the unintended consequences of imposing so many new rules so quickly, which he compared to the danger of mixing medications.

“I’m arguing that erring on the side of caution is to be cautious about how far we go,” he said. “And for a lot of other people erring on the side of caution is, ‘The more armor plate we put on these ships the better, because we never want them to sink again.’ ”


The New York Times

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