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Uncertain Leadership Strains Financial Overhaul

When federal financial regulators next gather to compare notes and coordinate plans, one of the requirements of a banking law intended to prevent the next financial crisis, 5 of the 10 seats at the table will most likely be empty or filled by caretakers.

The Obama administration has not announced nominees for several positions that Congress created last summer, nor has it nominated new heads for three agencies, including for an imminent vacancy at the Federal Deposit Insurance Corporation.

Sheila Bair
CNBC.com
Sheila Bair

As a result, temporary leaders tapped by the president increasingly are responsible for the vast overhaul of financial regulations, raising concerns that their decisions will prove more vulnerable to political pressure than permanent leaders insulated by Senate confirmation to a fixed term.

“I look back on my last five years and all the tough decisions I had to make, and if I’d been in an acting capacity, it would have been very inhibiting to me in making some of the tough decisions I had to do,” Sheila C. Bair, who in early June will complete her term as chairwoman of the F.D.I.C.,told the Senate Banking Committee on Thursday.

The vacancies have accumulated in part because Senate Republicans have blocked votes on nominees for a wide range of positions. The White House, in turn, has not rushed to add names to the list. In one case, it has temporarily circumvented the Senate by giving the Harvard professor Elizabeth Warren acting responsibility for a new agency focused on consumer financial protection.

The White House also appointed an acting director for the Federal Housing Finance Agency, which oversees the mortgage finance giants Fannie Mae and Freddie Mac. The agency has operated without a permanent head since August 2009. And since August, 2010, an acting director also has run the Office of the Comptroller of the Currency, which oversees most of the nation’s largest banks.

A new position on the Federal Reserve Board, vice chairman for supervision, has remained vacant since it was created last summer. So has a seat on the council of regulators designated for someone with insurance expertise.

Amy Brundage, a White House spokeswoman, said that President Obama would announce nominees for the positions “as soon as possible.”

“The president is looking for strong, well-qualified candidates who can lead these institutions to protect American consumers and taxpayers, while ensuring the stability of an American economy emerging from the worst recession since the Great Depression,” she said.

The White House soon plans to nominate a replacement for Ms. Bair at the F.D.I.C., according to people familiar with the matter who spoke on condition of anonymity because no plans had been publicly announced. The front-runner is Martin J. Gruenberg, currently the agency’s vice chairman, who worked for years as a Democratic staff member on the Senate Banking Committee.

A decision also is close on a nominee for comptroller of the currency, those people said.

The lack of permanent leadership is a significant handicap, according to current and former regulators. It is fairly easy to keep doing the same things, but much harder to navigate unexpected difficulties or to consider new ideas.

And agencies are being asked to do both of those things as perhaps never before.

The sweeping overhaul of financial regulations passed into law last year requires agencies to write hundreds of rules, an unprecedented task, even as they grapple with the unfamiliar financial landscape left by the crisis.

John Walsh, the acting comptroller of the currency, said that Treasury Secretary Timothy F. Geithner had encouraged him to do the job as if it were, indeed, his job.

“But the fact is that I have said to him and have said repeatedly that I do think it’s very important for independent supervisory agencies to have nominated and confirmed heads in place,” Mr. Walsh said Thursday at the same Senate hearing. “It’s important for independence and for the perception of independence.”

Senator Sherrod Brown, an Ohio Democrat, said Thursday that the absence of leadership was complicating the work of identifying “systemically important” financial firms that could pose a threat to the broader economy.

“We need strong nominees who will not be afraid to take bold steps to prevent a new financial crisis,” Mr. Brown said. Senators from both parties urged regulators at a hearing Thursday to offer more detailed criteria for designating such firms, which will be subject to stricter regulation.

Bank holding companies with more than $50 billion in assets automatically fall under the designation, according to the Dodd-Frank law approved last year. But there is no clear standard for selecting other kinds of financial firms like insurance companies, hedge funds and investment managers.

"We need a watchdog, not a lapdog..."

Proposals issued by regulators in January “lacked the necessary specificity that we need to understand how this process is going to unfold,” Senator Pat Toomey, a Pennsylvania Republican, said at the hearing. Senator Mark Warner, a Democrat from Virginia, agreed. “We’ve got to give some more clarity here, the sooner the better.”

Regulators, racing against a January 2012 deadline to complete the work, told the committee that they agreed more details were necessary, and that they hoped to release a package of proposed rules this summer.

But Ben S. Bernanke, the Federal Reserve chairman, said regulators still would need to make subjective decisions in some cases.

“I don’t think we can provide an exact formula that will apply mechanically without any application of judgment,” said Mr. Bernanke who played a leading role along with Mr. Geithner in the government’s bailout of certain banks and financial institutions in 2008.

The difficulty of appointing regulators to make those decisions was underscored in December, when Senate Republicans blocked the nomination of Joseph A. Smith Jr., the commissioner of banking in North Carolina, to lead the housing finance agency.

“We need a watchdog, not a lapdog,” Senator Richard Shelby of Alabama, the ranking Republican on the banking committee, said in voting against the committee’s decision to send Mr. Smith’s nomination to the Senate floor.

After losing that vote 10 to 6, Republicans refused to allow a vote on the nomination, and Mr. Smith, bowing to the inevitable, withdrew.

Last week, Senate Republicans went one step further, announcing in a letter to Mr. Obama that they would not consider any nominee to lead the new consumer protection agency until Democrats agreed to reduce the agency’s powers by rewriting the Dodd-Frank law that created the agency last year.

“We are simply asking the president to support common-sense reforms that provide the accountability absent in the current structure,” Mr. Shelby said in a statement last week.

Tim Johnson, the chairman of the banking committee, a Democrat from South Dakota, said Thursday that he was “increasingly concerned” by the Republican position.

“Not having strong individuals in place at the agencies as we continue to implement Dodd-Frank,” he said, “seems to me to be detrimental to our fragile economic recovery and financial stability.”

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