U.S. News

Regulators Feuding as Banking System Faces Overhaul

Stephen Labaton and Edmund L. Andrews|The New York Times

Two of the nation’s most powerful bank regulators were once again at each other’s throats.

At a public meeting three weeks ago , John C. Dugan, the comptroller of the currency, blasted a proposal to impose stiff new insurance fees on banks as unfair to the largest banks, which he regulates. The financial crisis stemmed in part from problems at small banks, he insisted.

Sheila C. Bair , chairwoman of the Federal Deposit Insurance Corporation and the regulator for many smaller, community banks, could barely hide her contempt. The large banks, she said, had wreaked havoc on the system, only to be bailed out by “hundreds of billions, if not trillions, in government assistance.” She added, “Fairness is always an issue.”

Behind the scenes, the two regulators have been clashing over a host of issues, officials said, be it the administration’s coming regulatory overhaul or Ms. Bair’s campaign to shake up the top management at Citigroup .

The long-running and deeply personal feud between Mr. Dugan and Ms. Bair, two Republican holdovers with similar career paths in Washington, is now helping to shape President Obama ’s attempt to revamp financial regulation aimed at preventing the regulatory lapses that contributed to the economic crisis.

Some of Mr. Obama’s advisers and some senior Democratic lawmakers have suggested creating a single bank regulator. But the administration’s current version, which could be announced as early as this week, would not combine the regulatory agencies. Instead, it would give Mr. Dugan and Ms. Bair significant new powers — and could intensify their turf battles.

Ms. Bair and Mr. Dugan declined to comment for this article.

The Treasury secretary, Timothy F. Geithner , the main author of the administration’s plan, in recent weeks has refereed among the competing views of Ms. Bair, Mr. Dugan and Ben S. Bernanke , the Federal Reserve chairman. The four generally agree that, if starting from scratch, they would not create the cumbersome system that has evolved piecemeal over the last 150 years.

But with the administration and crucial lawmakers rejecting a single agency, the four officials have often disagreed on just how to streamline and strengthen regulation. Some points of contention include views on which agencies should play central roles in overseeing financial companies whose troubles could pose problems for the overall system, and whether to create a new agency to protect consumers from abusive mortgages or credit cards.

Officials say the latest version of the plan, in large part, is a compromise of various viewpoints.

“On an issue like regulatory reform, with so many differing opinions, the expectation is not that all sides will agree on the final product,” said Andrew Williams, a Treasury spokesman. “But the administration worked hard to gather information from all parties to prevent a crisis like this from ever happening again.”

Mr. Obama’s economic team has often had internecine battles over policy, but the president’s advisers generally fall in line once he makes the final decision. But Mr. Dugan and Ms. Bair are semi-independent regulators whose feuds have multiplied — and at times erupted in public.

Most of the banking industry couldn’t be happier with the current system. Bank executives and lobbyists say that the system, while flawed, enables regulators to tailor rules for a variety of financial institutions. They maintain that the policy issues for small banks differ markedly from, and often conflict with, those involving the large banks.

“It’s healthy that the regulators disagree,” said Camden R. Fine, head of the Independent Community Bankers of America. “Out of their tension comes good, balanced policy.”

But the fractured nature of regulation also makes it easier for financial institutions to shop for the friendliest regulator or pit agencies against one another, lawmakers say. To reduce that risk, the administration is expected to propose eliminating one of the weakest agencies, the Office of Thrift Supervision.

The agency was faulted for missing problems at some of the largest savings associations, like Washington Mutual and IndyMac , as well as at the American International Group , which it regulated because the company owns a thrift.

Two Democratic senators, Christopher J. Dodd of Connecticut and Charles E. Schumer of New York, have urged Mr. Geithner to combine the four federal bank regulators into one.

“With multiple bank regulators, you get the worst of both worlds,” Mr. Schumer said. “Some banks get conflicting signals. Other banks get no signals at all.”

Mr. Dodd said that, despite his support for a single regulator, he favored the F.D.I.C.’s continued role as the manager of the bank insurance fund. He said the plan was intended to reduce regulatory gaps but not discourage healthy debate among officials.

“Despite the fact that I’m an advocate of a single regulator, I like the idea of some tension,” Mr. Dodd said.

Other Democrats, notably Representative Barney Frank of Massachusetts, have so far succeeded in convincing the administration that such a proposal is more political trouble than it is worth. And some banking experts say that the number of regulators is not the crucial factor.

“What’s most important is who the leaders are,” said William K. Black, a former senior lawyer for the agency that became the Office of Thrift Supervision, and who brought cases against many savings and loans in the 1990s.

The Obama plan, still being drafted by Mr. Geithner, is likely to give the F.D.I.C. new authority to seize and shut down financial companies in serious trouble.

The administration is also expected to propose an agency to oversee financial products sold to consumers, like mortgages and credit cards. Both those ideas were supported by Ms. Bair and challenged by Mr. Dugan.

The regulatory plan would also establish the Federal Reserve as a super-regulator to police risk across the financial system, a proposal supported by Mr. Dugan and criticized by Ms. Bair.

The fighting between Mr. Dugan and Ms. Bair reflects the institutional interests of their respective agencies, as well as the differences between big banks and small banks.

“The F.D.I.C.’s primary role is as the deposit insurer, so it is inclined to be risk averse,” said Brian C. McCormally, a former regulator in the comptroller’s office who is a partner at the Washington law firm Arnold & Porter.

Ms. Bair and Mr. Dugan have fought over many other issues. In recent weeks, Ms. Bair has sought management changes at the large troubled banks, including Citigroup. Mr. Dugan, on the other hand, has advocated giving Citigroup managers more time to put their house in order.

The résumés of the two regulators might make it seem as if they would get along. Both began their political careers as aides to Republican senators and both served as assistant Treasury secretaries under Republican presidents, at different times.

Ms. Bair’s approach to policy has evolved significantly from a conservative Republican aide to Senator Bob Dole of Kansas to a top regulator who now derives much of her political clout from her close ties to senior Democrats, notably Mr. Frank and Mr. Dodd. Both lawmakers urged the White House to retain Ms. Bair.

“She’s been brilliant,” Mr. Frank said in an interview. Mr. Frank said she recognized long before officials in the Bush administration that it was vital for the government to more aggressively support the housing market and reduce foreclosures. He also lauded her for a series of decisions that have helped community banks.

But at the Treasury and the Federal Reserve, Ms. Bair is viewed as someone who pushes her and her agency’s interests rather than someone who finds common ground with other policy makers. Besides Mr. Dugan, she has antagonized many other leaders in Washington.

Officials at the Federal Reserve and the comptroller’s office said she exasperated them last fall when she balked at allowing Citigroup to take over Wachovia, a major bank that was about to collapse.

In bruising negotiations that lasted until 4 a.m., Ms. Bair squared off against Mr. Bernanke, Mr. Dugan and the Treasury secretary at the time, Henry M. Paulson Jr. The stand-off left many officials, who thought the broader financial crisis had given them no alternative but to finance the deal, fuming.

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When Wells Fargo a few weeks later made a more generous offer for Wachovia that required no government aid, Ms. Bair enraged Citigroup executives, some bank officials said, when she backed Wells Fargo and helped scuttle Citi’s deal.

Her supporters said she believed that she had a duty to take an active role and could not afford to sit on the sidelines, hoping that the plans of the Fed and Treasury turned out well.

Mr. Dugan, a more low-key regulator, has also worked as a lawyer representing some of the largest banks.

He derives much of his influence from his close relationship with Mr. Geithner, reinforced when they worked on the banking crisis last year under the Bush administration.

The proposal to overhaul financial regulation must be approved by Congress, where it could be reshaped drastically.

“This is the kind of thing that reminds me of the anecdote about the old man and the sea,” said Mr. Dodd, the Senate Banking Committee chairman. “It’s going to take so long to drag it in that by the time it gets to the boat, it could come in as a set of bones.”